What is Ichimoku Cloud and how to read it?
Ichimoku Cloud (or Ichimoku Kinko Hyo) is a Japanese technical analysis method. It combines leading indicators, defines resistance and support levels, trends, and provides potential entry points for traders. It is known as a somewhat more advanced technical indicator but one that many professional traders like to use. It provides more data points than standard candlesticks and many traders consider it an improvement over more basic chart setups. The Ichimoku Cloud consists of five lines plotted on a candlestick chart. Being originally a Japanese indicator, many of the original terms have Japanese names, so let’s start with them:
- Tenkan-Sen = Conversion Line, is simply the average of the last 9 trading periods
- Kijun-Sen = Base Line, is the average of the latest 26 trading periods
- Senkou Span A (Leading Span A)
- Senkou Span A is the average of the first two lines, Tenkan-Sen and Kijun-Sen. It is plotted 26-periods ahead of the current period and forms the faster Cloud boundary.
- Senkou Span B (Leading Span B)
- Senkou Span B is the average of a 52-period High and a 52-period Low and is also plotted 26-periods into the future forming the slower Cloud boundary.
- Chikou Span
- Chikou Span is simply the Closing Price, plotted 26-periods back.
By selecting Ichimoku Cloud in your Skilling platform these will automatically be plotted for you. To analyse the indicator:
The Base Line always follows the Conversion Line which is the yellow line in the picture. The Conversion Line is the fastest and most sensitive component of the indicator. The Leading Span A and Leading Span B forms a cloud representing the average of the Base and the Conversion Line. The dark clouds are calculated with 9 and 26 periods, hence they always move faster than the light clouds which are the average of 52 periods.
This indicator is excellent in helping to identify strong trends and signals for bullish or bearish entries. For analysis, traders should start with the Clouds. The Clouds are there to support the entry signals, hence they can show the trend direction. So, for example, the market could be deemed in an uptrend if Span A is above Span B and Chikou Span is above Span B. And it would be classified as a downtrend provided Span A was below Span B and Chikou Span was below Span A. Thus, with these formations traders have an opportunity to spot trends but they can also help highlighting levels when the trends are changing indicating potential stop loss levels.
What is the trigger for entries?
Having identified a trend direction one has to find the best time or price at which to enter the market. The Conversion and the Base Line will provide signals where one might open a short or a long position. Very similar to the 9 and 26 period moving average cross strategy (cross link), one slight difference being that the lines in the Ichimoku indicator are based on the mid prices and not closing prices.
The Ichimoku Cloud should not be the only indicator used for your trading strategies but it does provide a very good indication of potentially sound entry levels. You can easily add this indicator to your Skilling trading platform. You just need to type Ichimoku into the indicator drop down menu. Further, here you can also set up colours as well as change input data.
Ichimoku Cloud is definitely a more advanced technical analysis tool. You should perhaps get familiar with all the Basic and Medium level indicators before you tackle this one. It is used by many professional traders as it provides a deeper level of market insight. As such, we think it is very useful for experienced traders to test and see if they like it but only once they have already attained a certain level in their trading career.
Not investment advice. Past Performance is not indicative of future results.
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