What’s the Ichimoku Cloud?
The Ichimoku Cloud is a technical indicator set that indicates support, resistance, momentum, and trend direction. It plots numerous averages on a chart. Using these numbers, it also computes a “cloud” to predict price support and resistance.
Japanese journalist Goichi Hosoda published the Ichimoku Cloud in the late 1960s.1 This chart offers more information than the traditional candlestick chart. While initially complex, people with chart reading may easily comprehend well-defined trading signals.
How to Calculate Ichimoku Cloud
For the conversion line, the highs and lows are the highest and lowest prices during the past nine days. Here are the procedures to compute it manually or by adding the Ichimoku Cloud indicator to your chart:2
- Calculate Conversion and Base Lines.
- Calculate Leading Span A using previous calculations. Once computed, this data point is shown 26 periods ahead.
- Work out Leading Span B. Plot this data 26 periods ahead.
- To calculate the Lagging Span, plot the closing price 26 times ago on the chart.
- A cloud is created by coloring the difference between Leading Span A and B.
- Color the cloud green when Leading Span A is higher than B. Color the cloud red when Leading Span A is below B.
- The preceding processes generate one data point. After each period, repeat the processes to produce fresh data points for the lines. Create lines and clouds by connecting data points.
Ichimoku Cloud: What Does It Tell?
The technical indicator provides quick access to crucial information through averages.
The price trend is up above the cloud, down below it, and trendless or transitional in the cloud.
Leading Span A rising above Leading Span B confirms the uptrend, and the area between the lines is green. Downtrends are confirmed when Leading Span A falls below Leading Span B. The gap between the lines is usually crimson.
The Ichimoku Cloud is used as support and resistance by traders based on price. The cloud gives future support and resistance levels. This distinguishes the Ichimoku Cloud from other technical indicators showing current support and resistance levels.
For optimal risk-adjusted returns, traders should combine the Ichimoku Cloud with additional technical indicators. The indicator is typically used alongside the relative strength index (RSI) to confirm momentum in a specific direction. The significant trends should also be examined to determine how the smaller ones fit. During a steep decline, the price may briefly touch the cloud or rise above it before dropping again. Focusing on the indication might obscure the price’s significant longer-term selling pressure.
The indication can also be utilized for crossovers. Look for the conversion line to rise above the baseline when the price is above the cloud. This can boost buying. You can hold the trade until the conversion line dips below the baseline. Any other line might be an exit.
Difference between Ichimoku Cloud and Moving Averages
Ichimoku cloud averages differ from moving averages. To calculate simple moving averages, sum all closing prices and divide by the number of closing prices. To calculate a 10-period moving average, add the closing prices from the past ten periods and divide by 10.23
Notice that the Ichimoku Cloud estimations diverge. They are calculated by dividing period highs and lows by two. Even with the same periods, Ichimoku averages differ from moving averages.
Instead of being better, indicators convey information in different ways.
Limitations of Ichimoku Cloud Use
The indicator’s lines might clutter a chart. Most charting software hides lines to fix this. All lines except Leading Span A and B, which form the cloud, can be concealed. Each trader should focus on the most informative lines and hide the others if they’re distracting.
Historical data limits the Ichimoku Cloud. Two of these data points are shown in the future, but the algorithm is not predictive. Future averages are plotted.4
Over time, the cloud might become unimportant if the price remains above or below. The conversion line, baseline, and crossovers are particularly essential at these times since they stick closer to the price.4
Meaning of Ichimoku in English?
The Japanese term “ichimoku” refers to support and resistance levels that one can see at a glance.
What Are Tenkan and Kijun Sen?
Tenkan and Kijun Sen are Japanese names for Ichimoku cloud moving average lines.
The Tenkan Sen averages the highest and lowest lows over the past nine periods.
To calculate the Kijun Sen, average the highest and lowest low over the last 26 periods.
Ichimoku Cloud Senkou Spans: What Are They?
Senkou Spans invented Ichimoku, “cloud.”Senkou Span A is the 26-times Tenkan Sen and Kijun Sen average before the price change. Senkou Span B averages and gives 26 periods ahead of the 52-period highs and lows.
What is the Ichimoku Cloud Chikou Span?
The Chikou Span measures market mood by plotting the most recent closing price 26 times behind price movement.
The Verdict
The Ichimoku Cloud shows numerous averages on a chart to produce a “cloud” of potential price resistance or support. Technical indicators include support, resistance, trend direction, and momentum. It has various drawbacks, although it is comparable to moving averages. Present information differently.
Conclusion
- Two of the five lines or computations in the Ichimoku Cloud form a darkened cloud.
- Lines consist of a nine-period average, a 26-period average, a combined average, a 52-period average, and a trailing closing price line.
- The cloud is crucial to the indication. When the price is below the cloud, the trend is down. When the price is above the cloud, the trend is up.
- Clouds are moving in the same direction as prices increase, following the trend above. Example: Uptrends show the cloud top going up, whereas downtrends show the cloud bottom falling.