The Ichimoku Cloud is a technical analysis indicator developed by Goichi Hosoda, a Japanese analyst, almost 50 years ago. It is a fully functional system showing the direction of a trend, support and resistance levels, and market entry points.
Breaking Down the Ichimoku Cloud
The indicator is composed of five lines, two of which compose the very Ichimoku Cloud. The trading strategy based on the instrument is primarily used for time frames like H4 and higher. Let’s review the composition of the Ichimoku indicator on a real chart. This is what it looks like when the instrument is set.
- Tenkan-sen is the red line of the indicator. It is a moving average for the past nine periods.
- Moving Average is also the blue line, but for the past twenty-six periods.
- Kijun-sen is the blue line.
- The third line shows the price at which the candlestick closed, but with a shift back to the period of Kijun-sen, in other words, to the 26th. It is green on the chart; it is called Chikou Span.
The following two lines form the Ichimoku Сloud:
- Senkou Span A is the yellow line;
- Senkou Span B is the purple line.
The Ichimoku Cloud is colored based on which level is on top. Trading strategies are based on the relative position of the lines with respect to each other, as well as on the location of the current price in relation to the levels.
Senkou Span A line is the distance between Tenkan and Kijun, calculated with a shift to the period of Kijun. Senkou Span B level is an average with a period exceeding the Kijun period by 3-4 times. The line is also built with a shift to the indicator of the Kijun period. It is also called the slow edge of the Ichimoku Cloud.
How can you use these data?
Under Ichimoku, trading strategies are based on the location of the lines compared to the price. Let’s review the main signals and the most popular methods of working with the cloud.
If the price is above or below Ichimoku, the strategy involves entering the market during the exit. Cloud edges act as support and resistance levels. So, if at the current moment the price is under the cloud, the Senkou Span B and Senkou Span A-lines will act as resistance for the pair. You need to sell at the time the price goes down from the cloud. The same goes for buying. When the price crosses the upper edge of the cloud from bottom to top, this is a signal to take a long position. The edges of the cloud will act as support levels further down the road. You can also set a stop loss for open positions here.
Kijun is the mainline indicating the market trend. As long as the price is above it, there is an upward trend. The direction can change after the price crosses this level and goes down, which is a signal to close existing buy orders. In this article, we review the blue line in the Ichimoku Cloud; it is considered the main market guide.
The next use of the Ichimoku indicator is related to the Kijun and Tenkan lines. Since they are moving averages, they can be used in trading in the same way as movings, namely, to trade at the crossing of the slow and fast average. This example only works in a trending market, so you should use additional signal filtering methods to cut off market noise.
Apart from that, we should talk about periods not suitable for trading. If the price is inside Ichimoku, the trading strategy indicates a flat that has settled on the market. The sideways trend is also indicated by the horizontal position of the Tenkan line. At this time, trading on the market will bring more loss than profit, so you should refrain from opening positions in any direction.
The following signals appear quite often, but they require additional confirmation. The example below shows the entrance to the buying of a pair. But before that, you have to do a few things. The price should be above the Ichimoku Cloud, which is yellow at this moment. In other words, the Senkou Span A line should dominate the Senkou Span B level. Then you need to wait until the price drops below the Kijun line, in other words, make a small correction during the going upwards, and cross it again, but from the bottom up.
In the case described above, the pair went for an even deeper correction, but the uptrend then gained strength again. If the stop loss was set at the lower edge of the Ichimoku Cloud, it would not have been brought down.
To open a trade for pair selling, you must fulfill the opposite conditions. The current price of the currency pair should be below the Ichimoku Cloud. The Senkou Span B line dominates the Senkou Span A-line. After some downward movement, the pair makes a correction and goes above the blue Kijun line on the chart. Then you need to wait until the price crosses it again from top to bottom, and only then should you open sales.
We recommend you set a stop loss at the level of the upper edge of the cloud, or at least outside the nearest local maximum. It all depends on what you want. If you prefer long positions and your profit plan is above average, you can set a higher stop loss. If the transaction involves a small profit, the stop loss may be less.
The Ichimoku Cloud is an effective tool for full technical analysis on the Forex market. Using the Cloud, you can determine the trend, find correction points, identify the market reversal early. Signal lag can be considered a con, which is also typical of the Moving Average, a basis for the Cloud composition. A variety of signals, self-sufficiency and a high level of accuracy are the main pros.
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