Ichimoku Cloud, also known as cloud indicator and daily average chart (Ichimoku Cloud), is a technical analysis method that combines multiple indicators in one chart. It functions as a trading tool on a candlestick chart, providing traders with a reference on potential support and resistance areas. It is also used as a forecasting tool to help traders identify future trends and market dynamics.

In the late 1930s, a Japanese journalist named Goichi Hosada proposed the concept of Ichimoku Cloud. However, his innovative trading strategy was officially launched in 1969 after decades of research and technical improvements. Hosada calls it Ichimoku Kinko Hyo, which in Japanese translates to "Balance Chart at a Glance."

How does it work?

The Ichimoku Cloud system displays data based on high and low price indicators. The chart consists of five groups of parameters:

1. Conversion line (Tenkan-sen): Take the 9th as the moving average.

2. Baseline (Kijun-sen): Take the 26th as the moving average.

3. Senkou Span A: predict the trend in the next 26 days through the moving average of the conversion line and the baseline

4. Senkou Span B: predict the trend in the next 26 days through the 52-day moving average.

5. Chikou Span: the difference between today’s closing price and the midline of the past 26 days.

The space between lead zone A (3) and lead zone B (4) Known as the Kumo, this parameter is the most noteworthy element of the Ichimoku system. The two leading bands can predict the market trend within 26 days, so they are regarded as leading indicators. On the other hand, the Lagging Band (5) is a lagging indicator that reflects the trend over the past 26 days.

By default, cloud bands are displayed in green or red for easier reading. When the leading band A (green cloud line) is higher than the leading band B (red cloud line), a green cloud band will be generated. Similarly, the exact opposite situation will produce red cloud bands.

Unlike other methods, the moving average used by the Ichimoku strategy is not based on the closing price of the candlestick chart. Instead, the average is calculated based on the highs and lows recorded during a given period (average of highs - lows).

For example, the standard calculation formula of the 9-day conversion line is:

Conversion line = (highest price in 9 days + lowest price in 9 days) / 2

Ichimoku Settings

After more than thirty years of research and testing, Goichi Hosada It is believed that the period setting of (9,26,52) has the best effect. At that time, the Japanese business schedule included Saturdays, so 9 represented a week and a half (6 + 3 days). The numbers 26 and 52 represent one month and two months respectively.

While this periodic setup is still preferred in most trading environments, chartists often adjust them to suit different market trading strategies depending on the situation. For example, in the cryptocurrency market, many traders usually set Ichimoku's period range from (9,26,52) to (10,30,60) to adapt to the 7*24-hour market. You can even directly set the period to (20, 60, 120) to reduce the generation of error signals.

Despite this, there is still debate in the market on how to effectively modify cycle settings. While some believe that adjusting the period makes sense, others claim that abandoning the standard settings would upset the balance of the system and create a large amount of ineffective interference signals. .

Analytical Charts

Ichimoku Trading Signals

Since it depends on a variety of elements, Ichimoku Cloud generates different types of signals. We might divide them into momentum and trend following signals.

Momentum signal: generated based on the relationship between market price, baseline and conversion line. A bullish momentum signal is generated when either or both the conversion line and the market price are above the baseline. A bearish momentum signal is generated when either or both the conversion line and market price move below the baseline. The crossover between the conversion line (Tenkan-sen) and the baseline (Kijun-sen) is often called a TK crossover.

Trend following signal: generated based on the color of the cloud band and the position of the market price related to the cloud band. As mentioned above, cloud band color reflects the difference between leading bands A and B.

In short, when the price is consistently above the cloud band, there is a higher probability that the asset is in an uptrend. On the contrary, when the price moves below the cloud band it is considered a bearish signal, indicating that a downtrend is about to occur. With few exceptions, when price moves sideways within the cloud bands, it is considered a flat or sideways trend.

Chikou Span is another factor that can help traders spot and confirm potential trend reversals. It provides predictions on the strength of price movements, with a bullish trend above the market price, or a bearish trend below the market price. Typically, the late travel band is used in conjunction with other factors of Ichimoku Cloud and is not used alone.

To summarize:

• Momentum signal

  • The market price is above the baseline (a bullish signal) and below the baseline (a bearish signal).

  • TK cross: The conversion line moves above the baseline (bullish) and below the baseline (bearish).

• Trend following signal

  • The market price is above the cloud band (bullish) and below the cloud band (bearish).

  • The color of the cloud band changes from red to green (bullish) and from green to red (bearish).

  • The late moving band is above the market price (bullish) and below the market price (bearish).

Support and resistance levels

Ichimoku charts can also be used to identify areas of support and resistance. Typically, Leading Band A (green cloud line) acts as a support line during an uptrend and as a resistance line during a downtrend. In both cases, the candlestick chart tends to be closer to leading band A, but leading band B can also serve as a support/resistance line if the price moves into a cloud band. More importantly, the two leading bands can help traders predict areas of support and resistance within the next 26-day cycle.

Signal Strength

The signal strength generated by Ichimoku Cloud depends heavily on their Does it fit in with a more general trend? A strong signal with a clear trend is always stronger than a signal that appears briefly and goes against the prevailing trend.

In other words, a false bullish signal can be generated if it is not accompanied by a bullish trend. Therefore, whenever a signal is generated, it is important to confirm the color and location of the cloud bands. Of course, transaction volume is also an important factor to consider.

Please note that using Ichimoku with shorter time frames (intraday periods) tends to generate a lot of noise and false signals. Generally speaking, longer time frames (daily, weekly, monthly charts) will produce more reliable momentum and trend following signals.

Summary Thoughts

Goichi Hosada has been dedicated to creating and improving the Ichimoku system for more than 30 years, This system is currently used by millions of traders around the world. As a versatile charting method, Ichimoku Clouds are used to identify market trends and momentum. Additionally, leading bands help experts predict potential support and resistance levels more easily.

Although Ichimoku charts may seem very complex and difficult to understand at first, they do not rely on subjective human input (e.g., drawing trend lines) like other technical analysis methods. While debate continues over how Ichimoku is set up, the strategy remains relatively easy to use.

Like any other indicator, Ichimoku should be used in conjunction with other techniques to confirm trends and minimize trading risk. The large amount of information displayed by this chart may also be excessive for beginners. For these traders, there are often other more fundamental indicators to consider before dealing with the Ichimoku Cloud as well.