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What is Ichimoku Cloud?

What is Ichimoku Cloud?
Asked by
Jane Goodwin categorie-icon time-icon4 months ago

Steve Walters
Answered time-icon4 months ago

Ichimoku Kinko Hyo (Ichimoku Cloud) is an indicator made up of several lines. While most other indicators attempt to show just one aspect of price action, Ichimoku Cloud is intended to provide a view of the whole market “at a glance.” For this reason, it is often used as a complete trading system.

Ichimoku Cloud example

The image above shows what Ichimoku Cloud looks like on a chart. The red line is the tenkan-sen (conversion line). The blue line is the kijun-sen (base line). The brown and white shape on the chart is the kumo (cloud). It is made up of the senkou span A (leading span A) and Senkou span B (leading span B). The green line is the chikou span (lagging line).

Ichimoku Cloud explained

Here are how the lines on the chart are calculated and what they mean.

Conversion line

The conversion line is a 9-period moving average. It is calculated by adding the previous 9 highs to the previous 9 lows and dividing by 2. This line is used to determine whether the market is trending or ranging. If the conversion line is rising or falling, the market is trending. If the conversion line is moving sideways, the market is ranging. In the image above, the conversion line is colored red.

Base line

The base line is a 26-period moving average. It is calculated by adding the previous 26 highs to the previous 26 lows and dividing by two. This line indicates whether the price is likely to move higher or lower in the future. If the price is above the base line, it is likely to move higher. If the price is below the base line, it is likely to continue moving lower. The base line is colored blue in the image above.

Leading Span A

Leading span A is calculated by adding the base line to the conversion line and dividing by 2, then plotting the result 26 periods ahead. During an uptrend, leading span A forms the top of the cloud. During a downtrend, leading span A forms the bottom of the cloud.

Leading span B

Leading span B is calculated by adding together the highest high and lowest low over the past 52 periods, then dividing by 2. The result is plotted 26 periods ahead on the chart. During an uptrend, leading span B forms the bottom of the cloud. During a downtrend, it forms the top of the cloud. The cloud is colored brown and white in the image above.

Lagging line

The lagging line is the most recent period’s closing price plotted 26 periods behind on the chart. If the price crosses the lagging line from below, it confirms a buy signal. If the price crosses the lagging line from above, it confirms a sell signal. The lagging line is colored green in the image above.

How to use Ichimoku Cloud to trade Forex

To trade using Ichimoku Cloud, follow these steps:

  1. Check to see if the price is above the cloud. If it is above, look for opportunities to go long. If it is below, look for opportunities to go short. The top and bottom lines of the cloud provide support and resistance. These are potential areas to place stops.
  2. If the conversion line crosses the base line from below while the price is above the cloud, this is a tentative buy signal. If the conversion line crosses the base line from above while the price is below the cloud, this is a tentative sell signal. Check the lagging line for further confirmation.
  3. To confirm a viable trade, check to see if the lagging line is above the cloud. If so, this provides confirmation of a buy signal. If the lagging line is below the cloud, this provides confirmation of a sell signal.

 

In this chart of XAU/USD (gold priced in U.S. dollars), the conversion line crossed the base line in April, 2018. However, the price was still above the cloud. The price moved below the cloud soon afterwards, but the lagging line was still in the cloud. When the lagging line moved below the cloud in late May (shown as late March because it is plotted 26 days into the past), this provided further confirmation of the sell signal. Afterwards, gold fell from $1290.02 to $1173.25. It then rebounded to $1199.56. The signal was then invalidated as the conversion line moved above the base line. This is a fall in price of  $116.77/oz.

Instead of focusing on one particular aspect of price action, Ichimoku Cloud attempts to provide a broad overview of the market for a currency pair. It can be used as a complete trading system.

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