Ichimoku Cloud

February 11, 2013

Relevance of Ichimoku Cloud to TradeCharting:

I have been tracking the Ichimoku Cloud Indicator on the USDX, EURX and Stock indices as well as on individual currency pairs since the beginning of 2012. I have found this indicator to be a most valuable indicator against which I assess my individual TradeCharting signals. I view this indicator much like a ‘weather map’; letting me know the best conditions to go out trading! The following articles on my website detail my trading journey utilising this indicator and the various ‘Epiphanies’, or revelations, I have made with it. I also detail the implications of these ‘Epiphanies’ for my approach to future trading.

The Ichimoku Kinko Hyo Indicator

The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a technical charting indicator. The indicator was developed by a Japanese journalist, Goichi Hosoda, and published in the 1960s.The term, Ichimoku Kinko Hyo, translates from the Japanese essentially as follows: Ichimoku means ‘one look’, Kinko means ‘equilibrium’ and Hyo means ‘chart’. Putting this all together equates to ‘One look equilibrium chart’. That is, with just one look you can assess the equilibrium, or status, of the chart of any trading instrument using this indicator.

The indicator helps to define areas of support and resistance and to identify trend direction and momentum. It does this by plotting current data against a forward projection of that same data. Some traders use this indicator, alone, as a source of trade entry signals. I use a simplified Ichimoku Cloud in my trading and I use it to help gauge:

  • the general trends across the markets and
  • the reliability of my TC signals.

My explanation of this indicator will, therefore, attend to the level of my usage. I suggest that you research independently if you wish to learn about this indicator in more detail.

The full Ichimoku Kinko Hyo Indicator employs 5 main systems and is essentially based on on the 9, 26 and 52 day levels that are similar to moving averages:

  1. Kumo (Cloud)
  2. Tenkan-sen
  3. Kijun-sen
  4. Senkou Span A: average of Tenkan + Kijun plotted 26 periods in future.
  5. Senkou Span B: average of Tenkan + Kijun plotted 56 periods in future.

I only use 3 of these main components of the Ichimoku Kinko Hyo Indicator. I use the ‘Cloud’ and the two, essentially, moving average lines that are referred to as the ‘Tenkan-sen’ and ‘Kijun-sen’ lines.

• Tenkan-sen (blue line): this line represents the midpoint of the high/low average obtained over a 9 day period.

• Kijun-sen (pink line): this line represents the midpoint of the high/low average obtained over a 26 day period.

• Ichimoku Cloud: The Kumo, or Cloud, is formed in the area marked by two boundaries. One boundary, Span A, is formed by the average of Tenken and Kijun lines and plotted 26 periods in the future. The other boundary, Span B, is formed by a plot of the midpoint of the high/ low average obtained over a 56 day period but also plotted 26 periods into the future.

Colour of Kumo (Cloud): The Cloud can form two different colours.

  • It forms ‘blue’ when the Cloud trends upwards. This is considered bullish for price.
  • It forms ‘pink’ when the Cloud trends downwards. This is considered bearish for price.

Width of Kumo (Cloud):

  • A wide Cloud: A wide Kumo (Cloud) offers more resistance/support to price movement as it reflects stronger trends and volatility from 26 periods ago.
  • A narrow Cloud: A narrow Kumo (Cloud) offers less resistance/support to price movement as it reflects weaker trends and volatility from 26 periods ago.

Using Ichimoku Kinko Hyo to provide trade signals.

The Ichimoku Kinko Hyo Indicator can be used to assess the best conditions to buy, or go LONG on an underlying, or to sell, or go SHORT. There are many different variations of how this indicator can be used to provide trade entry signals. The Ichimoku parameters that I find best for identifying optimum LONG or SHORT trading conditions are described below:

Ideal ‘LONG’ conditions: 

• The Tenkan-sen (blue line) is above the Kijun-sen (pink line) and both are trending upwards.

• Both Tenkan-sen and Kijun-sen lines are above the Cloud.

• The Cloud turns to blue.

 Ideal ‘SHORT’ conditions:

• The Tenkan-sen (blue line) is below the Kijun-sen (pink line) and both are trending downwards.

• Both Tenkan-sen and Kijun-sen lines are below the Cloud.

• The Cloud turns to pink.

No trend: It is important to note that the trend is understood to be flat, or directionless, when:

  • price is embedded within the Cloud.
  • The Kijun-sen line is trading flat/horizontally. This may reflect a period of consolidation before the next trend appears.