What is the Ichimoku Cloud and how do you use it in trading?
When trading, it’s useful to have a snapshot of market sentiment and price momentum to help you identify trends. Learn how the Ichimoku cloud can give you this overview and discover ways to use it.
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What is the Ichimoku cloud?
The Ichimoku cloud is a technical indicator represented as a cloud on a price chart, providing a snapshot of the general market trend. It defines support and resistance levels, gauges momentum and provides possible trading signals.
Developed by Goichi Hosoda, the Japanese journalist, the Ichimoku cloud was first published in 1969. Called the ‘Ichimoku Kinko Hyo’ in Japanese, it roughly translates to ‘one-look equilibrium chart’; a befitting description since, with just one look, traders can get a good amount of information.
When working with this indicator, there will be five lines on the price chart. The ‘cloud’ will form between two of these lines – called the Senkou Spans. Let’s dive into the different lines that make up the indicator:
- Tenkan Sen: also called the conversion line, the Tenkan Sen signals minor changes and resistance. It’s the average of the nine-period high and the nine-period low
- Kijun Sen: also called the base line, Kijun Sen is the confirmation line that can be used to analyse market price momentum. It’s the average of the 26-period high and the 26-period low. The base line is the midpoint of the 26-day high-low range
- Senkou Spans: there are two types of ‘leading’ lines – Senkou Span A and Senkou Span B
- The first marks the midpoint between the conversion line and the base line, forming the upper of the two cloud boundaries
- Senkou Span B is the midpoint of the 52-week range and forms the lower cloud boundary
- Chikou Span: the lagging span that provides the market sentiment by plotting the closing levels of the past 26 days. It’ll give a snapshot of the current market price in relation to historical trends. It can also help you note any potential reversals
How to interpret the Ichimoku cloud
To interpret the Ichimoku cloud, you must remember that it’ll give you limited information on market trends. You need to supplement this information with robust technical analysis and fundamental analysis before opening a position.
Firstly, the cloud. The Ichimoku cloud itself will appear red when the market price is in a downtrend and green when it’s in an uptrend.
Secondly, you can use the base line to determine price momentum in the short term. A crossover of the Tenkan Sen (conversion line) above the Kijun Sen (base line) shows that the momentum of the price level is increasing. When the Tenkan Sen is above the Kijun Sen, it’s an indicator of a buy signal. When it’s the other way around, it’s a possible sell signal.
If the price level is above the Kijun Sen, it means the market price has a bias to go upwards, since it’s above the 26-period mid-point price. In this instance, the cloud is seen as a support or resistance barrier.
When the Chikou Span – which indicates market sentiment – shows a decline in the price of the asset, it indicates that the market is bearish. The opposite is true when the span is above the market price.
The Ichimoku cloud can be used in combination with other technical indicators such as the relative strength index (RSI). The RSI will help you identify the momentum of the market price. It’ll also help you identify overbought and oversold levels, and financial market signals that have divergence or hidden divergence.
Formulas of the Ichimoku Cloud
There are several formulas used to calculate the Ichimoku Cloud, one for each line presented by the indicator.
Tenkan Sen = (Highest high+lowest low)/2 (for the past 9 periods)
Kijun Sen = (Highest high+lowest low)/2 (for the past 26 periods)
Chikou span = Most current closing price (for the last 26 periods)
Senkou Span A = (Tenkan line+Kijun line)/2 (plotted 26 periods ahead)
Senkou span B = (Highest high+lowest low)/2 (for the past 52 periods,plotted 26 periods ahead)
How to trade with the Ichimoku cloud
- Open an account or log in to your existing account
- Choose the asset you want to trade
- Right-click on the in-platform price chart and select ‘Ichimoku’ from the list of indicators
- Decide whether you want to buy or sell, set your position size and manage your risk
- Open and monitor your position
With us, you can access 13,000+ markets and go long or short on instruments such as spot forex, futures and options using CFDs (contracts for difference). Both are derivative products, which means you can trade using leverage. In other words, you can open a position using a deposit (margin) and get exposure to the full value of the trade.
Please note that leverage magnifies your risk, as profits and losses are based on the full position size. Manage your risk carefully and don’t commit more money than you can afford to lose.
Ichimoku cloud summed up
- The Ichimoku cloud is a technical indicator represented as a ‘cloud’ on a price chart, providing a snapshot of the general market trend
- The indicator is represented by five lines: Tenkan Sen, Kijun Sen, Senkou Span A, Senkou Span B, and the Chikou Span
- The cloud itself will appear red when the market price is in a downtrend and green when it’s in an uptrend
- The Ichimoku Cloud can be used in combination with other technical indicators such as the relative strength index (RSI)
- With us, you can access 13,000+ markets and trade the Ichimoku cloud pattern on instruments such as spot forex, futures and options using CFDs
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