TRADING WITH THE ICHIMOKU CLOUD INDICATOR
The "One Glance IndicatorOut Trade Your Competition…
We’re sure you’ve heard of it before, but never really understood it enough to use it confidently in your charts to make trades. In this IC guide, we’ll go through what you need to know to make some serious potential profits using this “all in one indicator”.
What does the ichi indicator actually do?
- Help define support and resistance,
- Trend direction,
- Gauges momentum
Ichimoku Kinko Hyo translates into “one look equilibrium chart” and that’s what this indicator does for us. At a glance and with a quick scan, you can get a very quick understanding of where the market or your current trade may be headed.
It is worth noting that – unlike other methods – the moving averages used by the Ichimoku strategy are not based on the closing prices of the candles. Instead, the averages are calculated based on the high and low points recorded within a given period (high-low average).
Parts of the Ichimoku
Kijun Sen (red line): Also called standard line or baseline, this is calculated by averaging the highest high and the lowest low for the last 26 periods.
Tenkan Sen (blue line): This is also known as the turning line and is derived by averaging the highest high and the lowest low for the past nine periods.
Chikou Span (green line): This is called the lagging line. It is today’s closing price plotted 26 periods behind.
Senkou Span (orange lines): The first Senkou line is calculated by averaging the Tenkan Sen and the Kijun Sen and plotted 26 periods ahead.
The second Senkou line is determined by averaging the highest high and the lowest low for the last 52 periods and plotted 26 periods ahead.
What Does Each Part Tell Us?
Senkou Span A is a line of the kumo cloud used to measure momentum and can provide trade ideas based on support and resistance levels. Like the Tenkan san line below, it’s a faster “moving average”, so it gives us a little more idea of shorter-term trend direction.
We look for it to cross above (bullish) or below (bearish) the Senkou Span B line to give an idea of trend and momentum.
It works in conjunction with this Senkou Span B (The “slower moving average”) line to form a cloud formation known as a “kumo” and when Senkou Span A & B cross, we get what’s known as a Kumo Twist.
We look towards them as future predictors of direction.
Tenken Sen (Conversion Line)
The Tenkan Sen or the conversion line is similar to that of the MACD signal line in that it’s a faster “moving average” that helps to give us an idea of a shorter-term market trend.
We look to what direction the conversion line points to show us whether we are potentially headed up or down on the time frame you are trading on.
From you the image above, you can see that when we are trending on top of the conversion line, we are considered bullish and it acts as a level of support.
Conversely, when we are trading below the conversion line, we are bearish and it acts as a level of resistance, as seen above.
Tenken Sen (baseline)
The Tenkan Sen or the base is similar to that of the MACD line in that it’s a slower “moving average” that helps to give us an idea of future market trends
On its own, the Kijun Line can also be used for analyzing price momentum. With the price is above the Kijun line, it means the price is above 26-period mid-point and therefore has an upward bias. If the price is below the Kijun Line, it is below the mid-point price, and therefore has a downward bias
Similar principals apply to the conversion and baseline, however, they are best used together to generate trading signals based on when they cross each other, giving us either bullish or bearish signals.
When the Tenkan Line crosses above the Kijun Line it signals that the short-term price momentum is moving to the upside, and may be interpreted as a buy signal.
When the Tenkan Line crosses below the Kijun Line it signals momentum has shifted to the downside and may be interpreted as a sell signal.
Chikou Span (Lag Line)
Also known as the “lagging span,” it is created by plotting closing prices 26 periods behind the latest closing price of an asset. The Chikou span is designed to allow traders to visualize the relationship between current and prior trends, as well as spot potential trend reversals.
A trend is deemed to be upward when the Chikou span appears above the price, and downward when the indicator appears below the price. Many traders watch for the Chikou span to cross with prior prices to signal a potential trend change.
The Kumo, also known as the Cloud, is the area between the Senkou Span A and the Senkou Span B and is at the center of the Ichimoku system.
The Kumo is primarily used to indicate probable future support and resistance levels, with the top of the Kumo indicating the first level of support and the bottom the second level when the price is above the Kumo. Conversely, the bottom of the Kumo indicates the first level of resistance and the top the second level when the price is below the Kumo.
A price above the Kumo indicates a bullish trend and a price below indicates a bearish one, while price within the Kumo indicates a potentially trend-less or range-bound situation.
Volatility: Like the Bollinger band, the cloud’s bandwidth is a measure of market volatility. In other words the amount of unpredictability that’s present. A wide or deep cloud means more volatility and less certainty on the direction. While a narrow, flat cloud means the market is more stable.
The cloud is also considered an “attractor” in that large gaps between price and the cloud will tend to close. So for example, if the price has extended far above the cloud this is a signal that a downward correction is likely.
Ichimoku Trading Strategies
A Note:
As with any indicator, the ichimoku is not the be-all-end-all indicator. It can provide some fantastic information and potential trading outcomes, but it’s also best used in conjunction with your own TA such as trend lines, lines of support and/or other indicators such as the MACD or RSI to find confluence of what you may already have on your chart before overlaying the ichi indicator.
- Draw your lines of support, resistiance and trend lines first
- Then overlay the ichimoku to see if things line us.
That will help to make you more confident about that level holding and let you know that what you’re drawing has a better probabtility of being correct
TK CROSS
The Tenkan Sen / Kijun Sen Cross signal occurs when the Tenkan Sen (Turning line) crosses the Kijun Sen (Standard Critical to the success of this strategy is the use of the position of the candles relative to the cloud.
We can’t just enter based on a cross, we need to take a look at where the cross is happening to interpret the strength of the cross itself.
E.g. Bullish TK cross above the Kumo is a strong bullish signal, whereas the same TK cross below the Kumo only signals to close shorts.
Similarly, a bearish TK cross inside the Kumo is a neutral bearish signal, whereas the same TK cross below the Kumo would be a strong sell signal
In short: the trend increases or diminishes the strength of the signal
Kumo Breakouts
Kumo Breakout signal occurs when the price breaks through one side of the cloud giving us an indication of a bullish or bearish move.
A bullish example of a kumo breakout would be when we see a candle break through and close above the cloud, which is bolstered even further with a proceeding candle closing above the cloud as well.
Once the price breaks above the cloud, we then look for the senkou span to act as support.
When this occurs, look for stronger confirmation of a bullish move by looking at the location of the lag line (or chikou span), if the lag line is also moving outside of the cloud to the upside, that’s a great indication that we have a bullish trend occurring.
Conversely, the exact same can be said for bearish kumo breakouts (but in the opposite direction)
Tip: Look to confirm the strength of price breaking through the cloud when the chikou span is also above the cloud = bullish confirmation
Kumo Twists
These occur when senkou span A and B cross or “twist”, to give us ideas of future price action and trends.
As above we can see when the cloud turned from green to red and we had a “bearish kumo twist” (Why bearish? Because Span A crossed down over Span B and the cloud turned red).
These are considered strong signals for market turning points.
Basics of Kumo Twists
- Senkou Span A Crosses below B (Bearish)
- Senkou Span A Crosses Above B (Bullish)
- Cloud is green (Bullish)
- Cloud is red (Bearish)
Bearish Clouds (Red)
- Red Cloud & the price is trading below Cloud, both senkou span A & B become lines of resistance.
- Red Cloud but the price is trading above the cloud, both senkou spans become lines of support.
Bullish Clouds (Green)
- Green cloud but price is trading below, both senkous become resistance
- Green cloud but the price is trading above, both senkous become support.
Edge to Edge Trade
As it sounds, an edge to edge trade occurs when price action moves from one side of the cloud to the other. This can happen in both bullish or bearish scenarios.
As can be seen above, we had a bearish edge to edge trade, where price rallied all the one from one side of the cloud to the other. When the price started trending within the cloud, the top of the cloud becomes resistance and the bottom of the cloud becomes support.
Often, traders will look for a strong confirmation of a break within the cloud before assuming whether an edge to edge is playing out. Look for confluence of a bearish or bullish scenario by looking at overall market direction through the use of other indicators such as the MACD, RSI or by using it together with other parts of the ichi indicator for the best results.
Ichimoku Indicator Settings
6As you can see on the image below of our custom UTG Ichi Indicator there are a number of potential settings you can use depending on what market you are trading, or simply personal preference.
The “crypto settings” of 20/60/120/30 were devised as the crypto market is 24/7 and does not close trading like FX or other regulated markets. This setting us best used with higher liquid coins or those with more trading data.
For coins with limited history available, the settings above would be changed to 10/30/60/30
Trading regulated markets such as Forex? Use the original 9/26/52/26
Final Thoughts
The ichimoku indicator has fast become one of our favourite trading tools and for obvious reason. It’s ability to provide so much information within the one indicator not only becomes a time saver, but also helps you to confirm your own TA and confidence in what you are seeing.
For a complete breakdown of how to use the ichi indicator, as well as all of the trading startegies above, take a look at the video below.
* 2021 Unity Trading Group PTY LTD. The information on this website has been created by Unity Trading Group (ABN: 630163343) for general information and educational purposes only and is not to be constructed as personal or financial advice. All forms of trading carry a high level of risk, and may not be suitable for all investors. Before deciding to trade any market reported on by Unity Trading Group you should carefully consider your objectives, financial situation, needs, and level of experience. By trading, you could sustain a loss in excess of your deposited funds. Before trading ASX/FX/Cryptocurrency markets you should be aware of all the risks associated with trading. Unity Trading Group recommends you seek advice from a separate financial advisor before making any decisions based on the general information given on this website or affiliated platforms.