The Ichimoku cloud was developed by Japanese journalist Goichi Hosoda and was published in the late 1960s after 30 years of development. Ichimoku is a moving average-based trend identification system which contains more data points than standard candlestick charts. Because of this it provides a clearer picture of potential price action. While it may look complicated at first glance, those familiar with trading charts often find it easy to understand with well-defined trading signals.
About the Ichimoku Cloud
The Ichimoku Cloud is an indicator that shows support and resistance levels, as well as momentum and trend direction, which it does by taking multiple averages and plotting them on a chart. These values are represented by a “cloud” which tries to forecast where support or resistance may be encountered.
The Ichimoku Cloud is composed of five lines or calculations, two of which make the cloud, with the difference between the two lines appearing in color – red or green. The lines include the following:
- 9-period average (Tenkan Sen)
- 26-period average (Kijun Sen)
- Average of 9 and 26-period averages (Senkou Span – line 1)
- 52-period average (Senkou Span – line 2)
- Lagging closing price line (Chikou Span)
The cloud is the key part of the indicator – when price is below the cloud the trend is down, and when price is above the cloud the trend is up, which we can clearly see from the above example. The ‘above’ trend signals are strengthened if the cloud moves in the same direction as price – during an uptrend the top of the cloud moves up, and in a downtrend the bottom of the cloud moves down.
How to Use Ichimoku Cloud
Ichimoku cloud makes it possible at one glance to spot the general trend of an asset simply by seeing whether the price is above or below the cloud. It is also possible to use the clouds as areas of potential support and resistance, which can be useful for setting bids, stops, and sells. As always, other technical indicators should be used together to assess overall trends. RSI is a good indicator to use with Ichimoku Cloud in order to confirm momentum in a certain direction.
Limitations of Ichimoku Cloud
Ichimoku Clouds can make a chart look busy and cluttered. To remedy this, change the settings to hide all lines except Leading Span A and Leading Span B, which is what you need to create the cloud. Ichimoku Cloud is also based on historical data, which can be inaccurate when trying to predict future moves. Also, if the price remains strongly detached from the cloud for a long period (see October-January in our above image) then the clouds can be largely irrelevant, and the conversion line, base line, and their crossovers become more important.
We hope you have found this breakdown of Ichimoku Clouds useful. Our Trading 101 series features many more key tools and indicators you can use to make your crypto trading more successful – click here to see our archives. Don’t forget to check back next week when we’ll be looking into Parabolic Stop and Reverse (SAR).