Ichimoku Cloud Definition and Uses

There can be two ways of evaluating a company’s stock while investing: technical analysis and fundamental analysis. 

When discussing technical analysis, there are various methods to decide whether it is an excellent time to sell or buy a stock, especially in the case of intraday trading. 

Today, we will talk about one of the most popular methods of technical analysis, Ichimoku Cloud. In this article, we will understand Ichimoku cloud, Ichimoku indicator, Ichimoku cloud indicator, Ichimoku trading strategies, Ichimoku trading, and Ichimoku cloud trading strategy. 

What Is the Ichimoku Cloud?

The Ichimoku Cloud is also known as Ichimoku Kinko Hyo. It is an adaptable indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals while conducting technical stock analysis. 

Ichimoku Kinko Hyo, which means “one look equilibrium chart,” is a Japanese term. Journalist Goichi Hosoda created the indication, which was then made available in his book in 1969. Chartists can see the trend at a glance and search inside it for potential signs.

The Ichimoku Cloud is a relatively simple indicator; the concepts are clear, and the signals are well-defined, even though it may appear complicated when examined on the price chart.

In comparison to the traditional candlestick chart, it offers more data points. While it may appear complicated at first, individuals who know how to interpret charts frequently find it simple to comprehend with clear trading signals.

A crucial component of the indication is the cloud. The trend is downward when the price is below the cloud. The trend is upward when the price is higher than the cloud.

If the cloud moves in the same direction as the price, the aforementioned trend signals are strengthened. For instance, the cloud’s top moves upward during an uptrend and its bottom move downward during a decline.

The Formulas for the Ichimoku Cloud

There are five plots that make up the Ichimoku Cloud indicator. Their names and calculations are:

  1. TenkanSen (Conversion Line): (High + Low) / 2 default period = 9
  2. KijunSen (Base Line): (High + Low) / 2 default period = 26 
  3. Chiku Span (Lagging Span): Price Close shifted back 26 bars 
  4. Senkou A (Leading Span A): (TenkanSen + KijunSen) / 2 (Senkou A is shifted forward 26 bars) 
  5. Senkou B (Leading Span B): 

(High + Low) / 2 using period = 52 (Senkou B is shifted forward 26 bars)

How to calculate?

The highest and lowest prices recorded throughout the period—in the case of the conversion line, the highest and lowest prices recorded over the previous nine days—are the highs and lows. If you wish to compute it manually, you can add the Ichimoku Cloud indication to your chart.

Here are the following steps that you need to follow:

  • Calculate the Conversion Line and the Base Line

A positive signal is generated during an uptrend when the Conversion Line crosses above the Base Line. Similarly, a negative signal is given when the Conversion Line crosses below the Base Line during a downturn.

  • Calculate Leading Span A based on the prior calculations

Span A is a 26-period ahead-plotted leading indicator.

It is determined by taking the average of the tenken and kijun values over the previous 26 periods. Since it takes a short time to calculate, this indicator mainly slants with the prices rather than remaining flat.

  • Calculate Leading Span B

This indicator is calculated by averaging together the last 26 periods.

Since it takes a while to calculate, it is usually flat; therefore, it can be used as a line of support when prices are above it and a line of resistance when prices are below it.

  • Plot the closing price 26 periods in the past on the chart to get the lagging span. The cloud is drawn by colouring in the difference between Leading Spans A and B.
  • Color the cloud green if Leading Span A is higher than Leading Span B. Color the cloud red if Leading Span A is lower than Leading Span B.

This is how you can calculate Ichimoku Cloud to make a technical analysis of a stock.

What does it indicate?

Now that we know everything about Ichimoku cloud trading strategies, let’s understand what Ichimoku cloud indicates. 

How should you assess the trend’s persistence and corrective actions?

  1. Price crossing the cloud signifies an upward trend.
  2. A downtrend is indicated when the price drops below the cloud.
  3. A sideways trend is indicated by price moving within the cloud.
  4. A cloud shifting from green to red indicates a correction during an uptrend.
  5. A cloud turning from red to green indicates a correction during a downtrend.

How to assess support and resistance levels through Ichimoku trading?

  1. The first support line for an uptrend is provided by Leading span A.
  2. A second support line for an uptrend is provided by leading span B.
  3. A downtrend’s first resistance line is provided by Leading span A.
  4. For a downtrend, Leading span B acts as a second resistance line.

How to recognize buy/sell signals 

  1. When the conversion line crosses Base line up from below, it is a signal to buy
  2. When the conversion line crosses Base line down from above, it is a signal to sell

Limitations 

There are always two faces of one coin, advantages and disadvantages. While pursuing Ichimoku Cloud trading strategies, you need to remember a few limitations it has while trading. 

There are three main limitations that you need to keep in your mind;

  1. The Ichimoku Cloud’s reliance on historical data is one of its drawbacks. It’s possible that historical patterns won’t repeat themselves as traders might anticipate.
  2. The Ichimoku Cloud may generate erroneous indications like any other technical indicator. 
  3. Also, the indicator might not consider patterns that extend over a long period of time.



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