More than just a set of squiggles plotted all over a market trading price chart, the Ichimoku Cloud, or Ichimoku Kinko Hyo, as it is known in its country of origin, Japan, offers much insight into market conditions, all at a single glance. It may seem hard to decipher at first, but once mastered can help traders make better decisions.
Developed in the 1930s, by a Japanese journalist named Goichi Hosoda, the technical indicator, after years of research, only saw the light of day during the 1960s. It comprises 5 Moving Average-like components (calculated differently, though similar) which offer multiple signals at a go. Mastery of the Ichimoku technical indicator is quite a straightforward affair. It simply requires one to understand what each component represents.
Components of the Ichimoku
There are five components to the Ichimoku Kinko Hyo, as previously specified, and each one offers different sets of information related to conditions in the market that one is viewing. There is the Kijun Sen (Conversion Line,) The Tenkan Sen (Base Line,) Leading Span A and B (otherwise known as Zenkosi Spam A and B,) as well as the Lagging Span (or Chikou Span.)
These five indicators each offer insight as to any given aspect of price action. Knowing how to read the Ichimoku cloud could help one glean buy/sell signals from the position of the price action (candlesticks) in relation to the Ichimoku cloud.
Tenkan Sen (Conversion Line)
The Tenkan Sen is known as the Conversion Line in western trading terminology. This is the fastest of the Moving Average-Esque components which make up the Ichimoku Cloud. Being the fastest line of the Ichimoku Indicator, it usually represents the 9-period (9-period high + 9-period low ÷ 2.)
Kijun Sen (Base Line)
The Kijun Sen can be found trailing somewhere, not too far, behind the Tenkan Sen. The Kijun is a baseline that represents an amalgam of slightly longer period highs and lows of a given period (usually the 26-period high + 26-period low ÷ 2.)
Senkou Span A (Leading Line A)
Senkou Span A is calculated to represent a population of future prices, it often offers a fairly accurate indication of where future resistance and support zone might be. The component is a combination of the Tenkan and Kijun lines (periods (Conversion Line + Base Line) ÷ 2.)
Senkou Span B (Leading Line B)
Senkou Span B Is usually the base of the Ichimoku Cloud when the market is experiencing a bullish period. Unlike Senkou A, Senkou B has plotted 26 periods ahead and represents the 52 periods high and low (52-period high – 52-period low ÷ 2.) The area between Senkou A and B is usually shaded green, or red, depending on market conditions. The shaded area is known as the Kumo.
Chikou Span (Lagging Span)
The Chikou Span is the slow line that seems to mimic price action. It is calculated using the closing prices of the past 26-periods and sort of places a line chart alongside the candlesticks. All the better to see higher lows with, my dear.
Reading The Ichimoku Cloud
Key things about reading the Ichimoku Cloud, that traders ought to know are:
- If price action is above the cloud, then the market which one is viewing is likely in a bullish trend
- The trend tends to be negative is price action plays below the cloud
- The market is either ranging or transitioning between trends if the cloud has price action traveling within it.
The Ichimoku Cloud is a good tool for determining trend direction, as well as momentum without having to layer multiple indicators over one another and cluttering one’s chart. Since the Ichimoku Kinko Hyo offers a statistical estimation of future price levels, as well as statistical data about the movements, traders can utilize the tool to determine potential resistance and support levels, beneficial for calculating Take-Profit and Stop-Loss points.
The Ichimoku Cloud, as mentioned above, can aid traders in determining trend direction. Aside from the cloud, traders can watch the Tenkan and Kijun lines. When Tenkan breaks above Kijun, the trend is positive. Trend momentum is high is There is a wide divergence between the two lines. The trend may be showing signs that it is running out of steam as the price action gets close to the Conversion and Baselines.
One can spot Support and Resistance levels via the Ichimoku Cloud. While the Kumo formed by Senkou Span A and B offers an indication of price direction, the two Spans offer insight into where future price floors and ceilings could be.
Line crossovers are usually a good indicator of a potential change in trend. If the Tenkan and Kijun, for instance, experience a crossover then price direction may be in for a switch-up. If the crossover happens below the cloud, then the move may be weak. If the crossover occurs mid-cloud, that is a neutral sign and things could still go either way. If the crossover takes place above the cloud, then things are, most likely, going up.
Closing thoughts for the Ichimoku
These are the basic principles to reading the Ichimoku Kinko Hyo indicator, keeping an eye on its changing dynamics will unlock more signals to work with. How one utilizes the multiple info points offered by the indicator depends, mostly on one’s person and trading style.