Trends emerge and subside.
Traders need a reliable beacon to guide us through the fog of uncertainty.
A powerful tool in this arsenal is the Ichimoku Cloud, a Japanese technical indicator that offers a multi-dimensional view of the market.
Today, we are going to dive into the depths of this indicator, exploring how it works, interpreting its signals and offering concrete examples so that you can take advantage of its potential in your own trading. Keep reading.
What is the Ichimoku Cloud?
Developed by financial journalist Goichi Hosoda, the Ichimoku Cloud is a set of five lines that reflect past prices, future prices, and trend lines.
Essentially, it creates a "cloud zone" that encompasses the current and future average price. offering insight into possible support and resistance dynamics. It is based on Japanese candlestick charts and is used to predict the future movement of asset prices.
The Ichimoku cloud indicator is made up of 5 lines that are calculated as follows:
Tenkan Sen = (9 - high period + 9 - low period)/2
Also known as the conversion line, Tenkan Sen is usually colored red and is represented as a moving average of the midpoints of the last 9 periods.
Kijun Sen = (26 - high period + 9 - low period)/2
Also known as the conversion + 26- low period)/2
Also known as the baseline, Kijun Sen is usually white in color and is represented as a moving average of the midpoints of the last 26 periods.
Senkou Span A
Senkou Span A = (Tenkan Sen + Kijun Sen)/2
Usually yellow in color, Senkou Span A is plotted as the midpoint of Tenkan Sen and Kijun Sen, and the line is projected 26 periods into the future.
Senkou Span B
Senkou Span B = (52- high period + 9 - low period)/2
Also known as the conversion + 52- low period)/2
Typically blue in color, Senkou Span B is plotted as a moving average of the midpoints of the last 52 periods, and the line is projected 26 periods into the future.
Usually colored green, Chikou Span is the current closing price, plotted from the last 26 periods.
The Senkou Span lines are what form the edges of the “cloud”. When Senkou Span A is above Senkou Span B, the cloud shadow is usually green; and when Senkou Span B is above Senkou Span A, the cloud shadow is usually red.
Interpreting the signals of the Cloud
When looking at the “weather” of the markets using the Ichimoku Cloud Indicator, it is important to start with the “cloud.” A green cloud indicates an uptrend, while a red cloud indicates a downtrend.
There is also bullish sentiment when prices are above the cloud and bearish sentiment when prices are below the cloud; Prices within the cloud indicate a neutral market stance.
Cloud size also matters; a narrow cloud implies a weak trend, while a wider cloud implies a strong underlying trend. As we told you before, cloud limits are calculated as moving averages. Therefore, it is important to observe the crossings of the Senkou Span lines, that is, the changes in the color of the cloud, which indicate trend changes.
Because the Senkou Span lines project into the future, they also act as potential dynamic support and resistance lines depending on where the price is.
For faster and more frequent trading signals, we can look at the Kijun Sen lines and Tenkan Sen in relation to price. For reference, Kijun Sen is an indicator of future price action and acts as a price magnet.
Generally, if prices are above Kijun Sen it means that the market can continue to rise, while if prices are below Kijun Sen it means that the market can continue to fall. A strong bullish signal occurs when prices are above a Kijun Sen line that is also above the cloud; while a strong bearish signal occurs when prices are below a Kijun Sen line that is also below the cloud.
The Tenkan Sen Line it is a shorter period moving average that reacts faster to trend changes and also takes recent price extremes into account. Its slope shows the market trend, and when it moves sideways, it indicates a market in range. Tenkan Sen is essentially a signal line. When the Tenkan Sen crosses above the Kijun Sen, a buy signal is given, while when the Tenkan Sen crosses below the Kijun Sen, a sell signal is given.
The Chikou Span is also an interesting line, mainly because the current closing price extends backwards. But this is very important to put the current price action into context. Chikou Span can confirm support and resistance levels, but it is the crossovers with the price of the asset that provide trading signals. When Chikou Span crosses the price from below a buy signal is given, while when Chikou Span crosses the price from above a sell signal is given. Crosses of Chikou Span with Kijun Sen and Tenkan Sen can also provide confirmation signals for buy and sell orders.
Best Ichimoku Strategies
It is a comprehensive indicator that can be used as a completely standalone indicator.
Even so, it can be complemented with other tools to offer low-risk, high-probability trading signals.
In trending markets, it complements well with the Fibonacci retracement tool. For example, when prices are above the cloud, traders can look at bullish Kijun Sen and Tenkan Sen crosses at important Fibonacci levels, such as 38.2% and 61.8%.
Ichimoku consists of multiple lines that can act as support and resistance, but remains a relatively weak indicator in range-bound markets. Ichimoku can indicate markets in range and by combining this tool with oscillators such as the RSI (Relative Strength Index) and Stochastic that signal overbought and oversold conditions, traders can choose the optimal entry and exit times in the markets. in range.
What is the best indicator to use with Ichimoku?
The Ichimoku can be used alone as an indicator, but when combined with other professional indicators powered by AI it is possible to find confluences that increase the strength and success of your strategy.
The Relative Strength Index seems to be one of the best to pair with the Ichimoku Cloud. The use of RSI can help you identify divergences and high probability reversal setups. Not only can the RSI help you locate reversals, it can even find long-term trend reversals with excellent profit potential.
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For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez