Ichimoku – Trading In The Clouds

Ichimoku (also known as Ichimoku Kinko Hyo or Ichimoku Cloud) is a popular technical analysis indicator which was developed in Japan in 1969. It is used by traders worldwide, although it remains most popular in Japan and there is a theory that the indicator works better when applied on the Yen pairs and the Nikkei, as those are the most widely traded instruments in Japan.

Translated into English, the name of the indicator is "One glance equilibrium chart" as traders can derive a range of information from it.

So, how does the Ichimoku indicator look like when plotted onto a chart?

Source: TradingView
Source: TradingView

While it may look slightly messy in the beginning, it will make more sense after we go through every part of the indicator in detail.

The Ichimoku consists of:

  • The Tenkan-sen = the sum of the 9-period high and 9-period low, divided by two.
  • The Kijun-sen = the sum of the 26-period high and 26-period low, divided by two.
  • Senkou Span A = the sum of the Tenkan-sen and Kijun-sen, divided by two. In other words, it represents the midpoint of the two lines, and the upper line of the cloud.
  • Senkou Span B = the sum of the 52-period high and 52-period low, divided by two. This represents the lower line of the cloud.
  • Chikou Span = shows closing prices 26 periods behind the latest closing price of an asset.
  • Kumo/Cloud = the space between Senkou Span A and Senkou Span B.

Now that you know what the Ichimoku indicator consists of, you are probably wondering how to actually use it in your trading.

Source: TradingView
Source: TradingView

The Cloud:

Using the Ichimoku indicator, a currency pair is in an uptrend when the price is trading above the cloud and the cloud is in green territory. On the other hand, a currency pair is in a downtrend when the price is trading below the cloud and the cloud is in red territory.

Trend followers who use this indicator will generally only consider long trades when it shows an uptrend and only consider short trades when it shows a downtrend.

The Cloud also indicates the level of volatility. Large price movements will lead to a thicker cloud, while a period of consolidation will create a thinner cloud.

Chikou Span

Some traders use the Chikou span as an additional confirmation of the trend (i.e. the line crossing the price in the bottom-up direction can be seen as buy signal, while the line crossing the price from the top-down may be seen as sell signal).

Senkou Span

If the price is above the Senkou span, traders look at the top line as the first level of support, followed by the bottom line as second level of support.

If the price is located below the Senkou span, traders look at the bottom line for the first level of resistance, and the top line as second level of resistance.

Tenkan/Kijun Cross

Some traders use the Tenkan/Kijun cross for additional confirmation or even as an entry signal when a crossover occurs.

How to Add Ichimoku In Your MT4

Source: MT4
Source: MT4

Summary

The Ichimoku indicator may appear to be complicated at the first look, but once a trader is aware what each of the components represents and how to use it, it can be a useful tool as it displays a variety of information.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.