The Ichimoku Kinko Hyo or Cloud is perhaps the most versatile and comprehensive technical indicator that technical traders use today. Multiple calculated lines and strategic comparisons that are involved in creating this indicator make it substantially superior (in some aspects) to other technical indicators in its category. Ichimoku Cloud may seem daunting to most people at the first glance, but this indicator, the name of which means “glance at a chart in balance,” is an excellent way for investors at all experience levels to make informed trading decisions.
The Ichimoku Kinko Hyo, also known as Ichimoku Cloud, is a trend indicator used in technical analysis that is composed of five lines. Two of these five lines intersect to form an enclosed area that resembles the shape of clouds, giving this indicator its name. The five lines that create this indicator can be used in isolation or in combination with each other to make informed trading decisions. In essence, this indicator provides information on the momentum, the volatility, the support, and the resistance of a price trend.
Structurally, the Ichimoku Cloud is designed to provide traders with an overall view of the markets by merely a quick glance at the indicator. Hence, the indicator yields many valuable insights that are vital in making accurate price predictions. In fact, due to the wonderful combination of technical signals that Ichimoku Kinko Hyo or Cloud provides, many traders exclusively use this indicator for making all their trading decisions. The remainder of this article will cover more on this indicator and various methods to trade using it, hopefully encouraging further research into this very informative trading tool.
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Table of Contents
History of Ichimoku Kinko Hyo or Cloud Indicator
The Ichimoku Kinko Hyo indicator was first developed in 1936 by a Japanese journalist, Goichi Hosoda, as a supplement for the standard candlestick chart. Hosoda spent over thirty years refining the calculations and perfecting the graph, before publishing a book on the subject in 1968.
Although the indicator is quite comprehensive and surprisingly easy to use, it was, and still is, not very popular in the West. However, a number of traders rely on this indicator to make informed trading decisions across the globe.
How to Read Ichimoku Kinko Hyo or Cloud Indicator?
The Ichimoku Cloud is an easy to understand and relatively straightforward to use indicator. It is designed to give traders a holistic perspective on the market conditions with merely a quick glance. However, as suggested earlier in the article, the indicator may look extremely complex to the eyes of a novice or traders who are inexperienced with using this tool. This is primarily because in comparison to other indicators in its category, the Ichimoku Cloud Indicator comprises many more components.
That being said, once you understand the overall structure of the indicator, and know how to read and comprehend its different components, it can be easily integrated into your trading strategy and can considerably improve your trading decisions.
To fully understand and comprehend the Ichimoku Kinko Hyo or Cloud Indicator, you need to get comfortable with three topics. These are –
- Construction of Ichimoku Kinko Hyo or Cloud Indicator
- Ichimoku Kinko Hyo or Cloud Indicator Calculations
- Interpreting Ichimoku Kinko Hyo or Cloud Indicator
In the following sections, we will cover each of these three topics with almost every possible detail that you need to know to get going with trading the Ichimoku Kinko Hyo or Cloud setups.
Construction of Ichimoku Kinko Hyo or Cloud Indicator
The Ichimoku Indicator is made up of five lines that are layered on top of a candlestick chart. The space between two of these five lines is called the Kumo or the Cloud, and it is due to its presence that the indicator is commonly referred to as the Ichimoku Cloud. Additionally, this cloud is structurally an important component of the indicator, and it provides valuable insights on the expected performance of a security.
To summarize, Ichimoku Kinko Hyo or Cloud is composed of six structural elements, which include five lines and one cloud. These are –
- Tenkan-sen (Conversion or Turning Line)
- Kijun-sen (Slow or Base Line)
- Senkou Span A (Leading Span One)
- Senkou Span B (Leading Span Two)
- Chikou Span (Delay or Lagging Span)
- Kumo – The Cloud
Of the five lines listed above, the space between the Senkou Span A (Leading Span One) and the Senkou Span B (Leading Span Two) is referred to as the Kumo or the Cloud.
The color of the indicator lines and the shading for the cloud on the price chart is up to the personal preference of the trader. That being said, typically the first four mentioned lines are solid, while the fifth one (Chikou Span) is dotted. Some technical traders also like to bold one of the two moving average lines (Tenkan-sen and Kijun-sen), but this is up to their discretion and can be adjusted on almost every charting platform.
In addition to the structure described above, there is one other key difference between the Ichimoku Cloud and other technical indicators that fall in this category. That is that the Ichimoku Cloud extends 26 periods further into the future. This extended plot is very unique to this indicator and it makes the signals generated by the indicator visually clear and easy to comprehend.
Now, before proceeding further into topics such as the calculation and the interpretation of these indicator components, let us first understand what each of these six components (five lines and a cloud) are in some more detail.
Tenkan-sen (Conversion or Turning Line)
The Tenkan-sen (Conversion or Turning Line) reflects a recent average of prices, and thus follows the price action very closely. The slope of the line follows the current market disposition: negative in a bear market and positive in a bull market.
The nature of the Tenkan line is to quickly respond to changes in the price action and, rather than providing additional signals, to confirm market trends. It can be used alone for very short term trades but is more efficient when used in conjunction with the Kijun line.
Kijun-sen (Slow or Base Line)
The Kijun-sen (Slow or Base Line) also reflects an average of prices (similar to Tenkan-sen), but over a more extended period of time. It is less volatile than the Tenkan line but moves in the same direction. In this way, just like Tenkan-sen, the Kijun line is also an indicator of the current market disposition.
Because the Tenkan-sen is more volatile, a crossover of the two lines is often used as a signal to trade.
Senkou Span A (Leading Span One)
The Senkou Span A (Leading Span One) line is the midpoint of the Tenkan and Kijun, but it is plotted 26 periods ahead of the current period. Therefore, it extends the graph beyond the candlesticks along the X-axis.
This line, along with Senkou Span B, makes up the most unique aspect of the Ichimoku Indicator: the visual prediction of support and resistance for future price action.
NOTE: Because the Senkou lines use past data to predict the future, they are not guaranteed to be accurate and, in fact, are often slow to react to abrupt changes in trend or price.
Senkou Span B (Leading Span Two)
The Senkou Span B (Leading Span Two) line is the counterpart of Senkou Span A; it is also plotted 26 periods in the future and is used to predict support or resistance.
Senkou Span B is also a moving average but is unrelated to the Kijun or Tenkan lines. Furthermore, it reacts even slower than Senkou Span A.
Kumo – The Cloud
The Kumo or the Cloud is simply the space between the Senkou Spans. It is shaded on the chart and resembles the shape of clouds. The Kumo itself acts as a buffer between the two layers of support (or resistance) delineated by the two Senkou lines.
The higher the volatility in the price, the higher will be the movement in moving averages, and consequently, the broader the cloud will be along the Y-axis. Contrarily, when there is less volatility in price, there is less variability in moving averages, and therefore the cloud formed on the price chart is relatively lean.
Finally, again, since the candlesticks only reach the Kumo 26 periods after they have been predicted, it is not guaranteed that the Senkou Spans and the Kumo will accurately reflect the actual price action.
Chikou Span (Delay or Lagging Span)
The Chikou Span is simply a shadow of the current price. This line takes the current price and plots it 26 periods behind the current period.
Ichimoku Kinko Hyo or Cloud Indicator Calculations
Even though most charting platforms will run the calculations for various components of the Ichimoku Indicator in the background and you will almost never need to calculate these components yourself, knowing how these components are calculated will considerably help you with their interpretation.
Therefore, in this section, let us briefly discuss how each of the six indicator components, and hence the overall Ichimoku Cloud indicator, is calculated.
The lines and areas of the Ichimoku Indicator are calculated in this order:
- Tenkan-sen is a nine-day (or period) moving average, which is found by averaging the highest high and the lowest low over the previous nine periods. Although any number of periods could be used in calculating this line, nine is generally accepted as the number that generates reliable results.
T = [(9PH + 9PL) / 2]
- Kijun-sen is a 26 day (or period) moving average, which is calculated by averaging the highest high and the lowest low over the past 26 periods. Historically, the number 26 was chosen for these calculations because there were 26 workdays during the month in Japan when Hosoda created this indicator, but it has now become the default setting for Kijun-sen calculation.
K = [(26PH + 26PL) / 2]
- Senkou Span A is calculated by finding the average of the Tenkan-sen and the Kijun-sen. This price point is then plotted 26 periods ahead of the current time period.
SSA = [(T+K) / 2]
- Senkou Span B is calculated by averaging the highest high and the lowest low over the past 52 periods. Similar to Senkou Span A, this line is also plotted 26 periods ahead.
SSB = [(52PH + 52PL) / 2]
- The Kumo or the Cloud is simply the space between the Senkou Spans, and thus requires no additional calculation. Because of the volatility and range of the Senkou Spans, when drawn on a chart, the Kumo is reminiscent of a line of clouds in the sky.
- Chikou Span is simply the current period’s closing price plotted 26 days back on the chart. There is no calculation involved with this line. It is just plotting it on the price chart that is needed.
The calculation of the Ichimoku lines sets this indicator apart from other moving average indicators because it uses the average of the highest and lowest prices, rather than using the close prices of each time period. Because it uses the midpoint of high and low prices, the chart calculations for a 24-hour market or periods smaller than one day are made easier.
Furthermore, because of the specific numbers chosen for the calculations of these lines, and because the averages are taken from the highest and lowest points, as opposed to the close prices, the Kijun and Tenkan lines can be better leveraged as support or resistance levels.
Interpreting Ichimoku Kinko Hyo or Cloud Indicator
Ichimoku Kinko Hyo or Cloud is a versatile technical indicator that signals trades in many different ways. It was designed as a one-stop-tool to provide an overall technical assessment of financial instruments that would otherwise need a series of technical indicators.
Depending on your trading strategy, you can use various components of the Ichimoku Cloud in isolation, or in combination with one another and/or with signals from other complementary tools. We will cover some of these trading strategies later in the article, but let us first understand what market insights each component of this indicator provides and how to comprehend them.
Described below, in the following subsections, are the ways in which you would comprehend signals from various components of Ichimoku Kinko Cloud.
Tenkan-Sen
The Tenkan-sen line is an indicator of on-going market trends. If this line moves up or down, it means that the market is trending in that direction; if it moves horizontally, it means there is no clear trend.
Generally speaking, the Tenkan-Sen crossing above the Kijun-sen is a buy signal, whereas the Tenkan-Sen crossing below the Kijun-Sen represents a sell signal.
Kijun-Sen
The Kijun line acts as an indicator of future price movement. If the price is higher than the Kijun line, it implies the price could climb higher. The same insight holds true in the opposite direction. Therefore, if the price is lower than the Kijun line; the price could continue to drop.
When a crossover of the two average lines (Tenkan Sen and Kijun Sen) occurs, this indicates a change in trend and signals a trade.
Senkou Spans A and B
Senkou Span A and B provide multiple insights on the expected future performance of a security. These insights are derived based on the position of the two Senkou Spans with respect to each other and the current price point of the security being analyzed.
Listed below are the key signals that can be extracted based on the position of these lines on the price chart of the security being analyzed –
- If the current price of the security is above both the Senkou Spans, the top line will be seen as the first support level, while the bottom line becomes the second support level. Similarly, if the price drops below both the Senkou Span, the bottom line will become the first resistance level, and the top line will serve as the second resistance level.
- A bullish trend is predicted when the Senkou Span A line is above the Senkou Span B line, as the shorter-term price is moving above the longer-term mid-point price.
- A bear market trend is predicted when the Senkou Span B line is above the Senkou Span A, as the shorter-term average price is below the longer-term average price.
- Just as with typical moving average lines, a crossover of the Senkou Span A and the Senkou Span B indicates a possible reversal in price trend.
Chikou Span
The Chikou Span is meant to help traders see the relationship between current and previous price trends, and to visually detect trend reversals.
One key way to leverage this line is to look at its relationship with the current price of the security.
- If the Chikou Span appears to be above the price, the trend is upward.
- Similarly, when the Chikou Span is below the price, the trend is deemed to be downward.
Additionally, many traders keep an eye on this line to see if it crosses the previous price trend, as such a crossover may potentially be used as a signal for an upcoming trend change.
Furthermore, the position of the Chikou Span with respect to the Kumo or the Cloud also provides meaningful insights that can be used to forecast the future price performance of the security.
- If the Chikou Span crosses the cloud in the bottom-up direction, this is a buy signal.
- If the Chikou crosses the cloud going in the top-down direction, this is a sell signal.
Finally, when making a trading decision based on the position of the Chikou Span on the price chart of the security that you are trading, you must note that the reliability of these signals takes a considerable toll in highly volatile markets. Therefore, you might be better off avoiding Chikau Span signals in markets with high volatility.
Kumo
The Kumo or the Cloud changes in shape and height based on changes in price. Larger price movements form thicker clouds and represent more volatility. Thick clouds create stronger support and resistance points and represent price levels that are not easily broken. Contrarily, prices can easily break through thin clouds, as they create relatively weaker support and resistance levels.
Additionally, when the Senkou Span A is above Senkou Span B, the cloud color is typically green, suggesting a bullish market. In contrast to that, when Senkou span B is above Senkou Span A, the color of the cloud typically becomes red, denoting a bearish market.
Finally, when interpreting signals from the Kumo or the Cloud, traders often look for “twists” or “a change in color” of the Cloud, as this represents an early sign of trend reversal.
Other Tips on Ichimoku Kinko Hyo or Cloud Interpretation
In addition to the above-described interpretations, there are several trading signals that are collectively generated by various components of the Ichimoku Cloud Indicator. These are –
- If all five lines of the Ichimoku Indicator are parallel, the trend will most likely continue in that direction.
- When the candles are inside the cloud, the market is in the process of consolidation; when you see this happen, you should avoid buying, or selling the security.
- Additionally, when the price candles are inside the cloud, the lower band of the cloud can be used as a layer of support, whereas the upper band can be used as a layer of resistance.
Improving Reliability of Ichimoku Kinko Hyo or Cloud Indicator in Trading
Ichimoku Kinko Hyo or Cloud is counted among the most reliable technical indicators out there. To a large extent, by providing a holistic view of the market in an easy to understand manner, Ichimoku provides an immediate bump to the accuracy of trades made using it.
In fact, according to a study published on Towards Data Science, the Ichimoku Indicator helped increase the accuracy of trade predictions over 5 to 10-day timeframes by over 10%, while the accuracy of 15, 30, and 60-day timeframe predictions rose by 9% using it. Generally speaking, the longer the time frame is stretched out, the less accurate will be the trades taken using the Ichimoku Cloud Indicator.
That being said, there are a number of things that you can do to improve the reliability of trading signals generated by Ichimoku Cloud even further. Adjusting indicator settings to best meet the needs of the market that you are trading in and your trading personality is beyond doubt the first step in the process. However, besides that, the best way to improve the reliability of the Ichimoku Cloud Indicator is to use it side by side with other complementary indicators to verify its findings and predictions.
Listed below are examples of some complementary technical analysis tools that are most commonly used with the Ichimoku Cloud Indicator to improve its reliability in trading –
- Candlestick Patterns
- Support and Resistance
- Oscillators
Now, without further ado, let us discuss how each of these above-listed tools complement the trading signals generated by Ichimoku Cloud.
Candlestick Patterns
Candlestick Charts are perhaps the most commonly used chart type employed by active traders and investors. Every candlestick on this chart provides valuable information on the psychology of the market, and you can use these insights to make accurate predictions on the future performance of the security. Based on the market psychology they represent, Candlestick Patterns are typically classified into two broad buckets, Reversal Candlestick Patterns and Continuation Candlestick Patterns.
Described below is how each of these Candlestick Pattern categories can be integrated into your Ichimoku Cloud trading strategies –
- Reversal Candlestick Patterns: As the name suggests, the presence of Reversal Candlestick Patterns on the price chart of a security signals an upcoming reversal in price trend. Therefore, when a reversal trade signal from the Ichimoku Cloud Indicator is synchronous with the appearance of a Reversal Candlestick Pattern, the accuracy or the reliability of such trading signals gets a significant boost.
- Continuation Candlestick Patterns: Continuation Candlestick Patterns suggest a continuation of the prevalent trend on a security’s price chart. Therefore, when your continuation trade signals from the Ichimoku Cloud Indicator are coupled with these Candlestick Patterns, the reliability of such trades get a considerable boost. Contrarily, when you are getting a reversal trade signal from Ichimoku Cloud but the price chart is filled with Continuation Candlestick Patterns, you should refrain from entering a reversal trade on such occasions.
Therefore, in summary, Candlestick Patterns serve as great confirmation tools to evaluate the trading signals produced by the Ichimoku Cloud Indicator. Hence, when you integrate these patterns into your Ichimoku trading strategy, the accuracy of your trades can be expected to get a considerable boost.
Support and Resistance
Support and Resistance are the levels on the price chart of a security where the probability of trend reversal is at the highest. In essence, these are the price points where the demand or the supply of the security is very high, causing the price trend to take a hit once it reaches these points.
When the price of a security falls to a Support level, a slew of investors waiting for an opportune time to buy the security, rush into the market. This regained interest in security causes an upward reversal in price trends and the price of the security begins to rise from it. Similarly, when the price of a security rises up to the resistance level, the investors holding the security begin to book profit on their trades, causing the upward momentum in the price trend to cease and triggering a downward reversal in the price trend.
There are many different methods to identify the Support and Reversal zones, including the use of Support and Resistance lines indicated by the Ichimoku Cloud Indicator. However, when there is an overlap of externally calculated/identified Support and Resistance areas with the Support and Resistance regions indicated by the Ichimoku Cloud, the reliability of these price levels to indicate an upcoming reversal in price trend gets solidified.
Therefore, similar to Candlestick Patterns, externally calculated/identified Support and Resistance zones provide good confirmation signals for reversal trades indicated by Ichimoku Cloud, thereby improving the reliability of reversal trades taken using this combination.
There are many different types of Support and Resistance zones that you can use to confirm the trading signals from the Ichimoku Cloud. The most commonly used types of these zones are as follows –
- Pivot Points
- Fibonacci Retracement and Extension Levels
- Envelope or Channel Indicators (Example – Bollinger Bands, Keltner Channels, Donchian Channels, etc.)
Oscillators
Oscillators form a category of technical indicators that are used to measure the momentum of a price trend. At its core, these indicators are used to determine if an asset is in an overbought or oversold condition.
Typically, oscillators, on their own, are insufficient in guiding trading decisions but form great confirmation tools for validating the trade signals generated by other chart indicators such as the Ichimoku Cloud Indicator.
Listed below are the key ways in which you can leverage the Oscillators to boost the accuracy of trades made using the Ichimoku Cloud Indicator –
- When a buy signal from Ichimoku Cloud is coupled with the oversold condition signaled by an Oscillator, it provides a solid confirmation for a bullish trade.
- Contrarily, if at the time of a bullish signal from Ichimoku Cloud, the oscillator reading is overbought, it indicates that the bullish signal from Ichimoku Indicator is not very reliable. In such situations, you are better off avoiding the signaled trades and should look for other trading opportunities.
Even though the above-listed pointers indicate how you would use Oscillators to confirm bullish trade signals generated by the Ichimoku Cloud Indicator, the same actions in reverse can be applied to confirm the reliability of bearish trades as well.
Finally, examples of Oscillators that best complement the Ichimoku Cloud Indicator include the Relative Strength Indicator (RSI), the Stochastic Oscillator, and the Williams % R.
How to Trade Using Ichimoku Kinko Hyo Indicator?
Now that we have covered the primary concepts around the structure, the calculations, and the interpretation of the Ichimoku Kinko Hyo or Cloud, and have discussed various methods to improve the accuracy of its trading signals, let us put that knowledge to work and understand how one can trade using this indicator.
Ichimoku Kinko Hyo or Cloud is a trend indicator and therefore the typical advice that experts give to trade using it is to follow the trend. This advice generally holds true and will serve you well, but there are certainly other methods to trade using this indicator as well. Additionally, you must always keep an eye on the current market conditions and use complementary tools to boost the reliability of signals generated by any one indicator.
Listed below are some popular strategies that are widely considered as reliable to trade the Ichimoku Kinko Hyo or Cloud Indicator –
- Ichimoku Bullish Method
- Ichimoku Bearish Method
- Ichimoku Cloud Crossover
Now, let us discuss how you would determine the trade entries, stop-losses, and take-profit exits under each of these above-stated strategies.
Trading Strategy 1: Ichimoku Bullish Method
Ichimoku Bullish Method is perhaps the most basic strategy that you can leverage to trade using the Ichimoku Cloud. In essence, this is a trend following strategy that emphasizes the existence of a bullish trend and looks for opportune moments to enter the market with bullish or buy trades.
In this strategy, profits are made by buying the asset (currency, stock, commodity, etc.) at a low price when the uptrend is just beginning and then selling the asset once the trend has peaked and the price is higher. This is also referred to as going long.
While this strategy is found to be very effective, you must note that it is not suitable for long term investments. Hence, you should consider this strategy for short term trading exclusively. If you are a passive investor looking to buy and hold an asset, this might not be the strategy of choice for you.
To summarize, in this strategy, you enter a trade after confirming the formation of a bullish trend, and you exit your position for profit once the signs of reversal become visible.
Now, let us briefly discuss the signals that you can leverage to determine your trade entries, stop losses, and take-profit levels under this strategy.
Determining Trade Entry
With this strategy, as discussed above, you look for signs of an established uptrend and use them to determine your trade entry positions. Described below are several reliable bullish trade signals that the Ichimoku Cloud Indicator generates under this strategy –
- When the actual price action is above the cloud: this signals an upward trend, and the cloud can then be used as support for the asset price.
- When the Tenkan-sen crosses above the Kijun-sen: the Tenkan-sen is the fastest line on the chart, and thus indicates short term price changes. By acting when the Tenkan (trigger line) crosses above the Kijun-sen (baseline), you can get a head start in buying before the bulls drive the price further up.
- When the Chikou Span is above the prior price: this indicates positive bullish momentum and an increase in buying pressure. This can be seen as an early indication for an upcoming bull market.
- When the Cloud is green: when the Senkou Span A is above Senkou Span B, it indicates that the future price is predicted to rise.
- When the Tenkan-sen, Kijun-sen, and Chikou Span are not in the Kumo: meaning that they are all using the Kumo as support. This particular setup is a very strong signal of a prevalent uptrend. Generally speaking, this is oftentimes followed by a bearish crossover that signals an upcoming trend reversal – something you need to be mindful of.
Determining Stop Loss Target
Stop losses are placed to mitigate losses; thus, when taking a bullish or long trade, you would ideally place a stop loss at just a few points below your trade entry. Then, if the uptrend signals based on which you entered the trade are false and the price fails to rise as expected, you will sell off the asset early and not be left holding the asset as its price continuously falls.
Based on this above-stated principle, with the Ichimoku Cloud Bullish Method, you can use the below-stated guidelines in determining the stop loss targets for your trades –
- At the time of trade entry, you can put your stop loss just a few points below the Kijun. When the price moves in your expected direction and Kijun starts to move up, you can move your stop loss accordingly so that it always remains a few points below the Kijun.
- Similar to the use of Kijun in determining the stop loss target described above, you can also leverage the Senkou Span A. The Senkou Span A (the top of a green cloud) is a reliable place for stops because that is the support for prices in an uptrend. Thus, your initial stop loss, at the time of trade entry, will be placed a few points below the Senkou Span A. Then, as your trade moves in profit and Senkou Span A rises with it, you will continue to move up your stop loss with it, thereby using a trailing stop approach.
Determining Take Profit Target
With this strategy, determining the take profit targets is relatively easy. In essence, since you primarily use a trailing stop loss based approach in this strategy, there is not always a need to rely on a take profit level. You can simply ride the uptrend as long as your trailing stop loss is not triggered.
That being said, while relying on trailing stop losses to exit a trade and not setting any take profit target at all is a reliable method to profitably exit trades under this strategy, there sure are alternative approaches that you can take when trading conservatively. Some of these alternate methods for determining the take profit levels are as follows –
- Exit the trade for profit when the Tenkan crosses below the Kijun line from above. This relatively risk-averse method can be treated as an early sign of upcoming trend reversal. However, with this approach, false signals are not uncommon. As a result of this, you will always risk leaving money on the table and exiting a profitable trade too early.
- For a riskier exit, wait until the price breaks through the cloud in the opposite direction; this is a historically more accurate signal of reversal but often happens late.
Trading Strategy 2: Ichimoku Bearish Method
This is another ideal and very straightforward strategy to trade using Ichimoku Kinko Hyo. It is best executed when the bears take control of the market after a bullish or a sideways trending market. Here, profits are made by short-selling the market.
This strategy is, in many ways, the mirror opposite of the Ichimoku Bullish Method discussed above. With the strategy, the trade should be entered when a downtrend is established and exited when a reversal is signaled. It is not a good strategy for those looking to invest passively. However, at the same time, it does not necessarily fit just the needs of day-traders, as often, trends can last for days or longer.
Now, let us discuss how you would determine trade entries, exits, and stop losses under this trading strategy in the following sections.
Determining Trade Entry
With this strategy, you can use the following signs as signals for an established downtrend and leverage them in determining entries for your short or short-sell position –
- When actual price action is below the cloud: this shows that there is selling pressure and that the bears are gaining control of the market. The price is lower than the predicted future price (as seen in the Kumo), and the Senkou Span B can be used as resistance.
- When the Tenkan-sen crosses below the Kijun-sen: this signals a bearish trend reversal and is a signal to place a short-sell order. Because the Tenkan-sen is a trigger line and is the fastest line on the chart, by acting on this signal, one may beat other sellers. However, this signal can be unreliable, especially in sideways or choppy market conditions.
- When the Chikou Span is below the prior candlesticks: when the lagging span is lower than the price (at the prior time, typically 26 periods ago), this means that there is an increase in the selling pressure and can signal an imminent sell-off.
- When the Cloud is red: the Senkou Span B is above Senkou Span A, and the future price action is predicted to decrease.
- When the Tenkan-sen, Kijun-sen, and Chikou Span are not in the Kumo: if they are below the Kumo, this means that a downtrend is developing and the Kumo can be used as resistance. That being said, in this setup, if one of these spans were to crossover, it would indicate a false reversal or a choppy market.
Determining Stop Loss Target
Stop losses are more critical when shorting than when going long, although they are definitely required in either case. The stop loss target should be placed at a point where your hypothesis behind the trade entry gets disproved and it is confirmed that the signals based on which you moved were false.
With that said, below is how you can determine the appropriate stop loss targets for your bearish trades under this strategy –
- When placing the order, place a stop loss above the current Senkou Span B price. As the trade moves in profit, continue moving your stop loss, just a few points above the Senkou Span B, with it.
- For a more conservative stop loss, instead of Senkou Span B, you can place a trailing stop loss above the Kijun-sen price.
- Similar to the Senkou Span B and Kijun-sen, the top of the cloud can also be used as a reliable target for trailing stop losses.
Determining Take Profit Target
Similar to the Ichimoku Bullish Method described above, you don’t really need a take profit target with this strategy. This is because you can primarily rely on trailing stop losses to exit your positions for profit at the right time.
That being said, below are some common alternate approaches for setting take profit levels under the Ichimoku Bearish Method Strategy –
- For conservative trading, close your trade for profit when the Tenkan crosses the Kijun from below (as this is a bullish signal). However, with this approach, false signals are not uncommon and there will always be the risk of exiting a profitable trade prematurely.
- If you have a higher risk appetite, wait until the price breaks through the cloud in the opposite direction; as also discussed above, this is a historically more accurate signal of reversal but often happens late.
Trading Strategy 3: Ichimoku Cloud Crossover
This strategy is also referred to as the Kumo Cloud Breakout Strategy. The name of this strategy comes from the imagery in the chart seen when the candlesticks (or other price indicators) “breakout” from the cloud, which typically acts as a guide for upcoming price actions.
In this strategy, a trade is to be executed when the price exits the Kumo (or the Cloud) by either rising or falling. As breakouts typically indicate a sudden emergence of an uptrend or a downtrend, such price actions offer a reliable signal to go long or short-sell with confidence, depending on the direction in which the breakout occurs.
Even though it is easy to spot these trading signals, false signals that can amount to heavy losses are not uncommon with this trading strategy. Hence, to increase the reliability of your trades, you must wait until the cloud is thin, thereby indicating a period of low volatility. This will help minimize the risk of entering trades in the event of false breakouts.
Determining Trade Entry
With this strategy, as discussed above, you wait for the price to cross the Cloud or the Kumo before entering either a buy or a sell position. Depending on the direction of the trade that you plan to take, listed below are several reliable signals that you can leverage to make, or to confirm, a trade entry decision –
Signals for Bullish Trade Entry:
- When the price closes above the Kumo Cloud: as stated above, this is a bullish signal; it shows that the actual price is rising above what the chart has predicted.
- When a positive slope Tenkan Sen is below a flat Kijun Sen or when Tenkan Sen is above Kijun Sen: the Tenkan-sen is the fastest and most responsive line on the chart. When it is positively sloped, it is reflecting positive increases in price.
- When Chikou Span is not crossing any lines or inside of a Cloud: this is an up- or downtrend indicator, because a heavily crossing Chikou Span is a sideways trend indicator.
- Enter when Senkou Span B has a flat or positive slope.
- Enter when Senkou A is above B and has a positive slope.
Signals for Bearish Trade Entry:
In essence, all the Bullish Trade Entry Signals described above in reverse, would indicate a potential entry or confirmation for a Bearish Trade. Listed below is a brief snippet on the same –
- When the price closes below the Kumo Cloud
- When a negative slope Tenkan Sen is above a flat Kijun Sen or when Tenkan Sen is below Kijun Sen
- When Chikou Span is not crossing any lines or inside of a Cloud
- When Senkou Span B has a flat or negative slope
- When Senkou A is below B and a negative slope
Determining Stop Loss Target
With the Ichimoku Cloud Crossover Strategy, similar to the other strategies, the Kijun and the Cloud are both possible options for setting up the trailing stops.
One should place the stops below the Kijun or the Cloud in an uptrend, or above the Kijun or the Cloud in a downtrend. The stops will pull a trader from his/her position, to prevent losses caused by a sudden (or otherwise unpredictable) change in trend.
Determining Take Profit Target
As discussed before, a crossover of the Tenkan and the Kijun is a strong signal for an upcoming trend reversal. Hence, you can leverage such a crossover as a sign for exiting trades and booking profits when trading conservatively.
Alternatively, you can rely on external tools such as the Pivot Points to determine the strong areas of resistance (in the case of a bullish trade) or support (in the case of a bearish trade) to determine your take profit targets on the price chart.
Day Trading With Ichimoku Kinko Hyo or Cloud Indicator
When following an active investment strategy, one must remember that with smaller trading periods and more frequent trading, there can be higher profits and losses. Particularly, in Day Trading, since most traders rely on high volume trades to make a decent return, it only takes a few seconds to lose a sizable amount of money.
As with all margin or high leverage trading activities, it is critical that you carefully select your stop losses when Day Trading. Negligent trading and lack of proper risk management could easily result in a Margin Call or a negative account balance for Day Traders.
That being said, in his book Ichimoku Clouds: The Essential Guide to Ichimoku Kinko Hyo Technical Analysis, Manesh Patel offers some really good tips on Day Trading using the Ichimoku Cloud Indicator. The most useful of those tips are listed as follows –
- You should avoid making more than five trades per day, with no more than two losses.
- In most market conditions, Kijun-sen will prove reliable as a stop loss for your trades. To be on the safe side, depending on the direction of your trade, you should always set your stop loss a few points above or below the Kijun-sen line.
- If you have a higher appetite for risk, you can set the stop loss for your trades at Tenkan-sen, instead of Kijun-sen.
- For Day Trading, you will need to use trading signals from Ichimoku Kinko Hyo or Cloud on very small timeframes. Generally speaking, 5-minutes and 15-minutes candlestick charts are considered ideal for Day Trading with this indicator.
- A crossover between the Tenkan-sen and Kijun-sen is considered to be a strong trading signal for Day Trading.
- In Day Trading, when the price of the security that you are trading pulls back to the Kijun-sen, you should almost always exit your position.
Advantages and Limitations of Trading Ichimoku Kinko Hyo or Cloud Indicator
Ichimoku Kinko Hyo or Cloud is beyond doubt one of the most comprehensive and versatile technical indicators out there. It is designed to present an overall viewpoint on the expected performance of a security in an easy to comprehend manner.
However, similar to any other tools in technical analysis, Ichimoku Cloud has its own set of strengths and weaknesses. To make informed trading decisions based on this indicator, it is critical that you know various pros and cons of this indicator, and that you consider them into your overall trading strategy.
Therefore, in the following subsections, let us discuss some of the most important strengths and weaknesses of this indicator.
Advantages of Trading Ichimoku Kinko Hyo or Cloud Indicator
Listed below are the major advantages of trading with the Ichimoku Kinko Hyo or Cloud Indicator –
- The use of highs and lows averages, as opposed to closing prices that are used in most moving average indicators, makes Ichimoku Indicator suitable for smaller time periods and 24-hour markets.
- The Ichimoku Cloud Indicator provides a broad set of quality information on the price trend of a security. This includes momentum, volatility, support, resistance, etc. Therefore, when trading using this indicator, the use of other supplemental indicators is not necessary.
- The resistance and support lines offer a clear display of the current trend and prediction of future price action.
- On relative terms, Ichimoku Cloud is easy to interpret and comprehend indicators. To the eyes of a trained trader, it will only take a quick glance to understand the direction, momentum, volatility, and sentiment of the price trend with this indicator.
Limitations of Trading Ichimoku Kinko Hyo or Cloud Indicator
Listed below are the major limitations of trading with the Ichimoku Kinko Hyo or Cloud Indicator –
- Structurally, to the eyes of an untrained trader, the Ichimoku Cloud might first appear to be a bit daunting. It comprises numerous lines and a shaded area, which can get confusing for traders who do not know what to look for.
- The indicator provides great insights and trading signals in trending markets. However, in flat markets, or in situations where there is no clear trend, the reliability of the indicator takes a serious hit.
- It is not very common in the West, although still included in most charting programs. This limited prevalence might be an indicator of its limited serviceableness.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
Technical indicators are vital to assessing financial instruments and trading opportunities for technical traders. They enhance the information provided by a simple price chart and provide both, visual and analytical, guidelines on the state of price movement for the security in assessment. Trends, momentum, volume, and volatility are examples of a few common information pieces for which traders rely on chart indicators.
Without the use of any indicator, it would be incredibly difficult for these traders to predict the future price performance of various securities. The price chart of security is invaluable but provides limited information in the absence of these chart indicators.
Ichimoku Kinko Hyo or Cloud is an excellent technical indicator that would fit the needs of most active investors who rely on technical analysis for making trade decisions. It is a trend indicator that, as a result of its 26-period forward-looking price prediction plots, not only works to confirm trends in the present but also acts as a forecaster for future price trends. Professional and amateur traders alike can use Ichimoku Kinko Hyo to make informed trading decisions for any asset of their choosing and over their preferred time frame.
Furthermore, Ichimoku does not require any supplemental chart indicators and provides traders with a one-stop-shop for all the necessary information regarding the volatility, the momentum, the resistance, and the support of a security’s price trend. Thus, many traders consider Ichimoku Cloud to be a superior indicator, in comparison to other trend indicators, as it can signal a wide array of information elements on the security’s price trend by itself.
Finally, to conclude, due to its versatile functionality and ease of use, Ichimoku Kinko Hyo or Cloud can prove to be a valuable asset to technical traders, regardless of the asset they are trading. Therefore, it is a tool worth considering, in case it’s not already a part of your overall technical trading strategy.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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