How To Trade With The Ichimoku Cloud
What Is The Ichimoku Cloud And Why Should You Use It
Itchy What? No, it’s not contagious, but it is very popular. The Ichimoku Cloud indicator is a powerful indicator used to indicate trend and levels of support and resistance.
The English translation for Ichimoku means “one look.”
If you’ve been in our Options Gold trading room, you might have heard Taylor Horton speak about this indicator and why it’s one of his favorites.
The Ichimoku cloud was created by Giochi Hosada and published in the 1960s. It has become more popular yearly as it provides five different data sets in a single indicator.
We will look further into how the Ichimoku Cloud works and why you should use it.
Core Components Of The Ichimoku Cloud
The Ichimoku Cloud consists of 5 key data points: Tenka-sen (Conversion line), Kijun-sen (Base Line), Senkou Span A, Senkou Span B, and the Chikou Span.
- The Tenka Sen, the conversion line, is a line that averages the highest and lowest points over the last nine periods.
- Kinju Sen is a baseline that averages the highest highs and the lowest lows of the last 26 periods.
- Senkou Span A (Green Line) is an average of the Tenka-sen and the Kinju-sen lines, plotted 26 periods into the future.
- Senkou Span B (Red Line) is a mid-point line that averages the highest highs and the lowest lows over the previous 26 periods, plotted 26 periods in advance.
- Chikou Span is a lagging line of the previous 26 period closing prices plotted in the past.
It’s always possible to get more granular and discuss the equations involved with each data point, but for simplicity, we will discuss the functionality of the indicator and its key highlights.
- The Ichimoku cloud consists of 5 different lines. Two of the lines create the upper and lower boundaries of a cloud that is usually shaded in green or red.
- The cloud is a key part of the indicator and is used to indicate the direction of the trend. If the price action is above the cloud, the trend is bullish. If the price action is below the cloud, the trend is bearish.
- Bullish or bearish trends are strengthened if the cloud is moving up or down with the trend. Example: The trend is moving higher, and the top of the cloud is moving higher, or the trend is moving lower, and the bottom of the cloud is moving lower.
A Gauge Of Trend On Multiple Timeframes
One of the easiest ways to use the Ichimoku Cloud is to detect a trend. This is done by comparing the price action in relation to the cloud. It’s very simple. If the price action is trading above the cloud, the stock is bullish and conversely, if the price action is below the cloud, the trend is bearish.
This same concept can be used in multiple time frames. If the price is above the cloud on a 5-minute chart, it’s indicating that the stock is bullish in a small time frame.
This is a powerful way to detect trends in multiple time frames. So if you’re a day trader like myself, you may use this indicator to help you identify trends.
In the video above, I show you guys how to also use the multiple interday time frames to get a sense of what the trend is right now, whether it’s a few minutes or, again, the trend on a big scale.
Provides Key Levels and Inflection Points
The Ichimoku Cloud also indicates key levels and flexion points to focus on, but it also gives you future levels to focus on. There are two main ways to identify trends using the Ichimoku Cloud. First, as we have established previously, the trend is up when prices are above the cloud, down when prices are below the cloud, and trading sideways when the price is within the cloud.
Second, more specifically, when a trend is positive, the green cloud line (Leading Span A) will be above the red cloud line (Leading Span B). And the opposite is true as well. If Leading Span B crosses over Leading Span A, the trend turns negative.
What’s The Difference Between Ichimoku Cloud and Moving Averages?
A moving average is an average of the closing prices in a specific period of time. For example, a 26-period moving average would take the 26 previous closing prices, add them up, and then divide by 26 to get the average.
The Ichimoku cloud would use both the highs and lows of the previous 26 periods, divided by 2, to find the mid-point, and then divide by 26.
Both Moving Averages and Ichimoku Clouds are averages of previous periods but provide different data points. They are each useful for different purposes.
The Ichimoku Cloud is a versatile tool that can be used in many different ways. While it takes some time to understand all of the components and how they work together, the end result is a powerful gauge of trend on multiple timeframes. This can provide key levels and inflection points for traders to watch as well when identifying potential trade setups.
If you’re interested in learning more about the Ichimoku Cloud or want to see it put into action, subscribe to our Options Gold Live Trading Room. Our expert traders will walk you through how to use this indicator and help you find trading opportunities using this valuable tool.