Ichimoku cloud

The next indicator we will explore in this course is the Ichimoku Cloud. This indicator is useful for quickly understanding trends and directions, and it also helps measure momentum.

1. What is ichimoku cloud?
2. How to draw ichimoku cloud
3. Trading with ichimoku cloud
4. Overview of ichimoku cloud

What is ichimoku cloud?

The Ichimoku Cloud is a technical indicator consisting of five different lines on the market: Tenkan, Kijun, Senkou Span A, Senkou Span B, and Chikou. The gap between the Senkou Span A and Senkou Span B lines creates a cloud, which is visually displayed on the chart. This allows traders to better understand trends and market volatility. The indicator provides a quick overview of trends, directions, and potential support and resistance levels.

The Ichimoku Cloud was developed in the 1960s by Japanese newspapers. At first glance, this indicator may seem confusing, but once you understand the basic concepts, its use is relatively straightforward. In Japan, this tool is known as the "one-glance equilibrium chart" because it provides a wealth of information in a single view, allowing traders to quickly analyze markets and make decisions based on a complete perspective of the situation.

How to draw the ichimoku cloud

To draw the Ichimoku Cloud, you first need to understand what each line represents. Let's begin with Tenkan and Kijun, also known as the conversion line and the baseline.

• Tenkan (conversion line) is calculated as the average of the highest high and the lowest low over the last 9 periods.

• Kijun (baseline) is calculated as the average of the highest high and the lowest low over the last 26 periods.

Thus, Tenkan represents the midpoint of the 9-period price range, while Kijun does the same for the 26-period range.

Once you know these two lines, you can draw the upper and lower boundaries of the cloud using Senkou Span A and B:

• Senkou Span A is the average of Tenkan and Kijun, divided by two. This line forms the top of the cloud.

• Senkou Span B is the average of the highest high and the lowest low over the last 52 periods, divided by two. This line forms the bottom of the cloud.

It's important to note that the cloud is not drawn at the current price. Instead, it is shifted 26 periods into the future.

Finally, Chikou Span is the current price, but it is plotted 26 periods in the past, giving traders another perspective on the historical market development.

Trading with the ichimoku cloud

The relationship between the various lines can quickly reveal much information about the current market conditions for traders.

Uptrend:

If Span A is above Span B, it indicates that the market is in an uptrend. In this case, the cloud is often colored green. When Span B is above Span A, the cloud is typically red, and the market may show a bearish trend.

Momentum:

Traders can also use the Ichimoku Cloud to assess the momentum of the market. For example, in an uptrend, the price usually remains above the cloud. If Tenkan crosses Kijun from below to above, it can signal another upward impulse, especially if this happens above the cloud.

Weakening uptrend:

If Tenkan crosses Kijun from above to below, it may signal a weakening uptrend.

Bearish Trend:

In bearish markets, the situation reverses:

• The price will typically be below the cloud.

• If Tenkan crosses Kijun from above to below (when both are under the cloud), it signals a strong bearish trend.

• If Tenkan crosses Kijun from below to above, it may suggest weakening of the bearish trend.

One of the main advantages of the Ichimoku Cloud is that it helps predict future areas of support and resistance, unlike other indicators that focus only on current areas of strength and weakness.

Overview of the ichimoku cloud