THE ICHIMOKU CLOUD is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction. It does this by taking multiple averages and plotting them on the chart. It also uses these figures to compute a "cloud" which attempts to forecast where the price may find support or resistance in the future.
It provides more data points than the standard candlestick chart. While it seems complicated at first glance, those familiar with how to read the charts often find it easy to understand with well-defined trading signals.
The Ichimoku Cloud is composed of five lines or calculations, two of which compose a cloud where the difference between the two lines is shaded in.
The lines include a nine-period average, 26-period average, an average of those two averages, a 52-period average, and a lagging closing price line.
The Cloud is a key part of the indicator. When price is below the cloud the trend is down. When price is above the cloud the trend is up.
The above trend signals are strengthened if the Cloud is moving in the same direction as price. For example, during an uptrend the top of the Cloud is moving up, or during a downtrend the bottom of the cloud is moving down.
- Bullish signal:
- Price cross above ichimoku cloud
- Cloud turns from red to green
- Price cross above the Base Line
- Conversion Line cross above Base Line
- Bearish signal:
- Price cross below ichimoku cloud
- Cloud turns from green to red
- Price cross below Base Line
- Conversion Line cross below Base Line
- Conversion line period: 9
- Base line period: 26
- Lagging span 2 period: 52
- Displacement: 26
The overall trend is up when price is above the cloud, down when price is below the cloud, and trendless or transitioning when price is in the cloud.
When Leading Span A is rising and above Leading Span B, this helps confirm the uptrend and space between the lines is typically colored green. When Leading Span A is falling and below Leading Span B, this helps confirm the downtrend. The space between the lines is typically colored red, in this case.
Traders will often use the Cloud as an area of support and resistance depending on the relative location of the price. The Cloud provides support/resistance levels that can be projected into the future. This sets the Ichimoku Cloud apart from many other technical indicators that only provide support and resistance levels for the current date and time.
Crossovers are another way the indicator can be used. Watch for the conversion line to move above the base line, especially when price is above the cloud. This can be a powerful buy signal. One option is to hold the trade until the conversion line drops back below the base line. Any of the other lines could be used as exit points as well.