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The Ichimoku cloud is a type of technical analysis that defines support and resistance levels, momentum, and trend direction. The Ichimoku was developed by Goichi Hosoda, a Japanese journalist in the 1960s. It is also called Ichimoku Kinko Hyo. Unless you have an understanding of Japanese, the terms Kijun, Tenkan, Senkou, Kumo, Chikou will seem rather obscure. However, they actually refer to one of the most popular trading systems: the Ichimoku system.
The idea behind the Ichimoku Cloud Strategy is to use a moving-average based trend method to indicate where a stock is likely headed next. In addition to price action, Ichimoku uses time as another element, and because greater data points are used, it is generally regarded as providing a clearer picture than Japanese Candlesticks.
What is the Ichimoku Cloud?
The Ichimoku is a collection of many indicators that display momentum, trend, and support and resistance levels by plotting various averages. The cloud in Ichimuko represents future projections of support and resistance levels. When the price is below the cloud, it signifies a downtrend, and when the price is above the cloud, it’s a signal of an uptrend.
The Ichimoku cloud’s main advantage is that it presents more data points than the ordinary candlestick chart.
Here’s what the pattern looks like on the chart:
The Ichimoku compromises of five lines, two of them form a cloud. These lines include a nine-period average, 26-period average, average of these two averages, and a 52-period average. The name of these five lines are; conversion line, base line, leading span A, leading span B, and lagging span A. The formula for these lines is:
- Conversion Line = 29-PH + 9-PL
- Base Line = 226-PH + 26-PL
- Leading Span A = CL + Base Line/2
- Leading Span B = 52-PH + 52-PL/2
- Lagging Span =Close plotted 26 periods
where:
PH=Period high, PL=Period low, CL=Conversion line
In Ichimoku Cloud, the above-mentioned formula is applied automatically; however, if a trader wants to implement it himself/herself according to their settings, they can do so.
While interpreting Ichimuko, some traders confuse it with the moving averages. While the Ichimuko resembles moving averages, the difference comes in their calculations.
How to use the Ichimoku cloud?
The Ichimoku provides buy and sell signals because of its ability to detect the trend and price momentum. Hence, it can be bullish and bearish.
Bullish Ichimuko
The bullish trend occurs when the leading span A crosses above the leading span B line, and when the price is above the cloud.
Bearish Ichimuko
The bearish Ichimuko appears when the leading span A crosses below the leading span B line, and when the price is below the cloud.
The Ichimoku produces a buy signal when the conversion line crosses above the base line. On the other hand, when the conversion line crosses below the base line, the Ichimuko generates a sell signal.
Note that If the price is hanging in the cloud, there is a chance of a reversal.
With all these lines on the chart, some traders can get confuse interpreting Ichimuko. To solve this problem, a trader can hide lines except for leading span A and B. These lines create the cloud and provide more information than other lines.
Ichimoku cloud trading strategy
Ichimoku Cloud is a trading system that defines support and resistance, identifies trend direction and gauges momentum. Investors and traders can therefore identify the trend and look for potential trading signals. A bullish crossing of one of the Ichimoku levels indicates a buy signal, while a bearish crossing indicates a sell signal.
In particular, the Ichimuko is helpful for day-trading and intra-day trading. Traders look for support and resistance levels, crossovers to determine the direction of the trend.
Traders may wish to combine the Ichimoku cloud with other technical indicators like the RSI to perfect their trading strategies.
Ichimoku cloud buy strategy
- The leading span A must crosses above the leading span B.
- Wait for the price bar to go bullish before entering.
- Enter the trade after the crossover.
- Place a stop-loss at a recent low from the candle after the crossover.
- Exit the trade when the Ichimuko shows a reversal.
Ichimoku cloud sell strategy
- The leading span A must crosses below the leading span B.
- Wait for the price bar to go bearish before entering.
- Enter the trade after the crossover.
- Place a stop-loss at a recent high from the candle after the crossover.
- Exit the trade when the Ichimuko shows a reversal.
Ichimoku cloud conclusion
There is a lot going around in the Ichimoku cloud. What traders can do is hide lines except for leading span A and B. The Ichimoku Cloud can be used on your forex trading platform charts to help filter potential trading signals as part of an overall trading strategy.
The Ichimoku cloud technical analysis indicator produces clear buy and sell signals to chartists.
You first need to get past some of the lingo, like Tenkan Sen and Kijun Sen. But once you do, the entry and exit points are clear.
Buy signals are generated when prices rise above the cloud, the cloud turns green, prices rise above the 26-period Kijun Sen, or the shorter term Tenkan Sen line rises above the Kijun Sen.
Conversely, sell signals are generated when prices fall below the cloud, the cloud turns red, prices fall below the 26-period Kijun Sen, or the Tenkan Sen line falls below the Kijun Sen.
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