Ichimoku Cloud (Ichimoku Kinko Hyo) is a powerful indicator not only for trading signals but also for the strength of the signals and support and resistance levels. Learn about Ichimoku cloud charts which combine the powers of many technical analysis indicators.
This versatile indicator is called Ichimoku Kinko Hyo in Japanese very handy technical analysis indicator for identifying entry and exit points, support and resistance levels and even trend identification.
Table of Contents
Though Ichimoku Cloud is a very powerful technical analysis indicator but it is ignored by the beginners of Forex trading. The reason is simple that because of it's large number of components, beginners tend to get confused and think that it is very complicated. But the truth is that Ichimoku is as simple as it is poweful.
We will try to explain it in very simple terms. It would be better if the focus remains on remembering the names of the components and how to use it rather than goint into the details of the formulae and construction part of it.
Before we start we wish to recommend that Ichimoku cloud charts work better on longer-time frame trading charts e.g. daily charts and should be avoided on shorter term charts e.g. 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 analyze if there an uptrend a downtrend or market is running in range (sideways movement)
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:
What are all these lines in Ichimoku Cloud Charts? :
(We are talking in days as we generally use Daily Charts)
Chart 2:
A) Position of price action with respect to the cloud:
C) Crossover signals:
D) Support and Resistance Levels:
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.
If the combination is not as mentioned above, then the signal to be considered as weak and should be ignored. For example:
If the combination is not as mentioned above, then the signal to be considered as weak and should be ignored. For example:
Continuous closing above the cloud means upward forces or uptrend.
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.
