Ichimoku Cloud definition

What is the Ichimoku Cloud?

The Ichimoku Cloud is a technical analysis indicator that defines support and resistance levels, gauges momentum and provides trading signals. In Japanese, it is called the ‘Ichimoku Kinko Hyo’ which roughly means ‘one look equilibrium chart’ – because with just one look, traders can receive a range of information.

The Ichimoku Cloud was developed by Goichi Hosoda, a Japanese journalist, and published in 1969. It has been used by traders and investors ever since, to identify the direction of market trends.

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The Ichimoku Cloud indicator is made up of five lines or ‘plots’:

  • The Tenkan-sen, known as the conversion line, is the nine-period high plus the nine-period low, divided by two. This is the midpoint of the 9-day high-low range, which means that the line spans just under two weeks.
  • The Kijun-sen, known as the base line, is the 26-period high plus the 26-period low, divided by two. This line is the midpoint of the 26-day high-low range
  • The Senkou Span A, known as the leading span A, is the conversion line plus the base line, divided by two. The leading span A marks the midpoint between the two lines, and forms the upper of the two cloud boundaries
  • The Senkou Span B, known as the leading span B, is the 52-period high plus the 52-period low, divided by two. As the midpoint of the 52-week range, this line plots just under three months and forms the lower cloud boundary
  • The Chikou Span, known as the lagging span, shows the closing levels plotted 26 days in the past

Why is the Ichimoku Cloud used in trading?

Traders use the Ichimoku Cloud to gather more information than an ordinary candlestick chart provides. What sets the Ichimoku Cloud apart from other charts and indicators is that is shows projections of future support and resistance levels, not just the current levels.

The Ichimoku Cloud should be used in conjunction with a variety of other technical analysis tools.

Example of the Ichimoku Cloud

When the actual cloud aspect of the Ichimoku indicator appears on a chart, it is as two lines filled with a colour. If the Senkou span A is above the Senkou span B on the chart, this indicates an upward trend and the cloud will appear green in colour. If the Senkou span B is above the Senkou span A, this indicates a predominantly downward trend and the cloud will appear red in colour.

The price line itself will appear above the cloud when the trend is up, and below the line if the trend is downward. If the price line sits within the cloud, it is assumed that the trend is ‘flat’ or horizontal.

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