What is Ichimoku Cloud Indicators | How to use

The Ichimoku Cloud, with its origins in Japan, is an all-in-one technical analysis tool that captures an asset’s trend, momentum, and support/resistance levels. Introduced by Goichi Hosoda in the 1960s, it provides traders with a comprehensive overview of the market conditions at a single glance.

What it is and what it shows
The Ichimoku Cloud is comprised of five main components, each serving a unique purpose in assessing the market conditions:

• Tenkan-sen (Conversion Line): This is calculated by taking the average of the highest high and the lowest low over the past 9 periods. It can represent a short-term momentum and key areas of support or resistance.
• Kijun-sen (Base Line): Calculated by averaging the highest high and the lowest low over the past 26 periods. It offers a longer-term momentum indicator and is a major signal line.
• Senkou Span A (Leading Span A): This is the average of the Tenkan-sen and the Kijun-sen, plotted 26 periods ahead. It forms one edge of the Ichimoku Cloud.
• Senkou Span B (Leading Span B): Calculated by averaging the highest high and the lowest low for the past 52 periods, then plotted 26 periods ahead. It forms the other edge of the Ichimoku Cloud.
• Chikou Span (Lagging Span): This is the most recent closing price plotted 26 periods back. It serves as a momentum indicator.

The space between Senkou Span A and Senkou Span B is shaded and known as the ‘Cloud’ or ‘Kumo’. The cloud serves as a visual representation of support and resistance levels. A cloud where Senkou Span A is above Senkou Span B is typically shaded green, indicating bullish sentiment, whereas the opposite is shaded red, indicating bearish sentiment.

How to trade it
Trading with the Ichimoku Cloud involves understanding its components and the relationships between them:

1. Price and Cloud Interaction: The position of the price concerning the cloud can provide trend insights. If the price is above the cloud, it indicates an uptrend; below the cloud suggests a downtrend. When the price is inside the cloud, the market may be in a consolidation phase or trend transition.

Example: If a stock’s price moves from below the cloud to above, it might signify a potential start of an uptrend.

2. Tenkan-sen and Kijun-sen Crossovers: Similar to moving average crossovers, when the Tenkan-sen crosses above the Kijun-sen, it can be seen as a bullish signal. Conversely, a bearish signal is given when the Tenkan-sen crosses below the Kijun-sen.

Example: If the Tenkan-sen line crosses above the Kijun-sen line while both are below the cloud, it might be a buying opportunity, especially if other indicators are also bullish.

3. Cloud Twists: When Senkou Span A crosses Senkou Span B, it’s known as a “twist” and can be an indication of a potential trend reversal.
4. Chikou Span Confirmations: The position of the Chikou Span concerning the price 26 periods ago can offer confirmation of other Ichimoku signals. If the Chikou Span is above the price, it confirms bullish signals; below the price confirms bearish signals.
5. Support and Resistance: The cloud itself can serve as an area of support or resistance. In an uptrend, the cloud can act as a support level, and in a downtrend, it can act as resistance.

While the Ichimoku Cloud offers a plethora of information at a glance, traders should always use it in conjunction with other indicators and tools for confirmation and enhanced accuracy.