Ichimoku Clouds
Ichimoku Cloud which is called Ichimoku Kinko Hyo in Japanese is a versatile and very handy technical analysis indicator for identifying entry and exit points, support and resistance levels and even trend identification. The beauty of Ichimoku clouds is that while it generates trading signals, it also tells us the strength of those signals.
Ichimoku Clouds or Ichimoku Kinko Hyo is a very beautiful technical analysis indicator but often an ignored one. The reason is simple that because it has many components and beginners tend to get confused and hence many times enough time is not given to make it understood. But a little patience with it can prove that cloud charts are just as simple as it could be.
We will try to have the explanation in simple terms but it would be better if the focus is on remembering the names of the components and how to use this indicator rather than the formulas and construction of it.
Before we start we wish to recommend that Ichimoku cloud charts are better to be used on longer-time frame trading charts e.g. daily charts and not shorter term line hourly charts etc.
Chart 1
For a bigger picture to see the construction of Ichimoku cloud, please check the link at the bottom of the page.
To know if there an uptrend a downtrend or market is running in range (sideways movement)
1) Buy Signals:
a. Strong Buy Signals
b. Medium Strong Buy Signals
c. Weak Buy Signals
2) Sell Signals :
a. Strong Sell Signals
b. Medium Strong Sell Signals
c. Weak Sell Signals
The main resistance and support levels can be derived from the Tenkan-sen, Kijun-sen and upper and lower edge of the main cloud. These levels indicated either the support level or the resistance level depending on the position of price action. If the price action is above any of these then these can be considered as the support levels and if the price action is below these then these can be considered as the resistance levels.
To simplify and categorize these as resistance levels 1, 2, 3 & 4 and support level 1,2,3 & 4, let's take the support example. In case the price is above all these 4 components and the Tenkan-sen is on the top of all these components followed by kijun-sen and then the upper and lower edge of the cloud then tenkan-sen will be support 1, Kijun-sen will be support level 2, the upper edge of the cloud will be support 3 and the lower edge of the cloud will be support level 4. Reversing this we get the resistance levels. In easy words, whichever is the closest to the price is support or resistance level 1 followed by the second closest and so on.
Before we go further please note that at the first glance the construction of Ichimoku clouds may seem to be complex but in fact people who have been using the crossover methods of moving averages or MACD will find that Cloud works in the similar way. And I assure you that once you start using this indicator. The beauty of cloud indicator is that it itself works as a combination of indicators and hence the name "Ichimoku" which means “One glance”.
The Ichimoku cloud consist of 5 lines. Out of the 5 lines, 2 lines called Senkou Span A and Senkou Span B make the Kumo (cloud in Japanese). The other three are Tenkan line, Kijun line and Chikou span. So the components are as follows:
1) Cloud or Kumo: made by Senkou Span A and Senkou Span B line.
2) Tenkan Sen (Tenkan Line)
3) Kijun Sen (Kijun Line)
4) Chikou Span
What are all these lines in Ichimoku Cloud Charts? :
1) Tenkan Sen (conversion line): Think of it as a modified 9-day moving average
2) Kijun Sen (base line): Think of it as a modified 26-day moving average
3) Senkou Span A (leading span A): (Tenkan-Sen + Kijun-Sen) / 2, pushed 26 days ahead
4) Senkou Span B (leading span B): (Highest High + Lowest Low) / 2, for the past 52 days, pushed 26 periods ahead
5) Chikou Span (lagging span): Today’s closing price plotted 26 days behind or pushed 26 days back.
(We are talking in days as we generally use Daily Charts)
Chart 2:
A) Position of price action with respect to the cloud:
1. When prices are closing below the Ichimoku cloud, it means a bearish trend or downtrend.
2. When the prices are closing over the cloud, it means a bullish trend or uptrend.
3. When the price action is inside the cloud, it means a range or sideways movement.
B) Position of Chikou Span with respect to the cloud:
1. Downward (bearish) pressure if Chikou Span is below the current price action.
2. Upward (bullish) forces if Chikou Span is above the current price action.
C) Crossover signals:
1) Tenkan line crossing Kijun line from underneath means a buy signal.
2) Tenkan line crossing Kijun line from above to below means a sell signal.
D) Support and Resistance Levels:
1) When Price action is below the cloud then the lower surface of the cloud can be considered as resistance level for any upward movement.
2) When Price action is above the cloud then the upper surface of the cloud can be considered as support level for any downward movement.
How to use cloud signals for Buying and Selling Signals considering various components together-
And this is the beauty of this indicator is that it can tell us the strength of the signals in one glance if we take the different components into consideration.
Points we need to observe:
1) Tenkan line crossing Kijun line from underneath to come above.
2) Tenkan line crossing Kijun line from above to below.
3) Where the crossover took place? Above the cloud (Kumo), Below the cloud or within the cloud?
4) Where is the price action at the time of the crossover? Above the cloud (Kumo), Below the cloud or within the cloud?
5) Where is the Chikou Span at the time of the crossover? Above the cloud (Kumo), Below the cloud or within the cloud?
a) Tenkan line crossing Kijun line from underneath to come above.
b) The price action is above the cloud.
c) Chikou span above the cloud.
d) Crossover taking place above the cloud.
a) Tenkan crossing Kijun line from underneath to come above.
b) The price action is above the cloud.
c) Chikou span above the cloud.
d) Crossover taking place within the cloud.
If the combination is not as mentioned above, then the signal to be considered as weak and should be ignored. For example:
a) Tenkan line crossing Kijun line from underneath to come above.
b) The price action is NOT above the cloud.
c) Chikou span is NOT above the cloud.
d) Crossover taking place below the cloud.
Chart 3:
a) Tenkan line crossing Kijun line from above to below.
b) The price action is below the cloud.
c) Chikou span is below the cloud.
d) Crossover taking place below the cloud.
a) Tenkan line crossing Kijun line from above to below.
b) The price action is below the cloud.
c) Chikou span is below the cloud.
d) Crossover taking place within the cloud.
If the combination is not as mentioned above, then the signal to be considered as weak and should be ignored. For example:
a) Tenkan line crossing Kijun line from above to below.
b) The price action is NOT below the cloud.
c) Chikou span is NOT below the cloud.
d) Crossover taking place above the cloud.
Chart 4:
1) Continuous closing above the cloud means upward forces or uptrend.
2) Continuous closing below the cloud means downward pressure or downtrend.
3) When Price action is below the cloud then the lower surface of the cloud can be considered as resistance level for any upward movement.
4) When Price action is above the cloud then the upper surface of the cloud can be considered as support level for any downward movement.
5) Tenkan line crossing Kijun line from underneath means a buy signal. The strength of signal depends on the position of the crossover with respect to the cloud, the position of price action with respect to the cloud and the position of the Chikou span with respect to the cloud.
6) Tenkan line crossing Kijun line from above to below means a sell signal. The strength of signal depends on the position of the crossover with respect to the cloud, the position of price action with respect to the cloud and the position of the Chikou span with respect to the cloud.
Formulas (just for reference and it’s not required to remember these)
• Tenkan Line (Conversion Line): (highest high + lowest low)/2 calculated over last 9 periods.
• Kijun Line (Base Line): (highest high + lowest low)/2 calculated over last 26 periods.
• Chikou Span (Lagging Span): (most current closing price plotted 26 time periods back.
• Senkou Span A (Leading Span A): (Tenkan line + Kijun Line)/2 plotted 26 time periods ahead
• Senkou Span B (Leading Span A): (highest high + lowest low)/2 calculated over past 52 time periods, sent 26 periods ahead.
The Ichimoku Kinko Hyo indicator was developed before World War II by Tokyo News Paper journalist Goichi Hosoda with the help of some of his assistants. The same was published in 1969.
The period setting for Ichimoku Kinko Hyo or Ichimoku cloud is 9, 26, 52. This translates into 1.5 weeks, one month and 2 months considering 6 days working week in those days in Japan. Many traders tend to change it to 7, 22, 44 considering the 5 days working week but the old standard settings of 9, 26, 52 give good results as many traders would still take decisions with that period settings. And one of the important reason for any technical indicators to give results is because many traders take decisions of buying and selling because of the signals generated. Now just assume that if there is a lot of buying if we get a bullish signal then the market would go still higher and that itself increases any technical indicator’s reliability.
Ichimoku: Ichi in Japanese is one (1). Ichimoku means “One glance”
Kinko = balance
Hyo = Chart
Ichimoku Kino Hyo = Balanced (equilibrium) chart at a glance
Sen = Line
Tenkan Sen = Conversion line
Kijun Sen = Base line
Senkou span A = Leading span 1
Senkou span B = Leading span 2
Chikou = Lagging span
Kumo = Cloud
Please click to check the Ichimoku Cloud construction
You may also check some videos about Ichimoku Kinko Hyo.
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