The Ichimoku Kinko Hyo also popularly known as the Ichimoku Cloud, is a versatile indicator that defines support and resistance, identifies trend directions and provides trading signals. Ichimoku Kinko Hyo translates into “one look equilibrium chart”. With one look, chartists can identify the trend and look for potential signals within that trend.
The indicator was developed by journalist Goichi Hosoda and published in his 1969 book. Even though the Ichimoku Cloud may seem complicated when viewed on the price chart, it’s actually a rather straightforward indicator; the concepts are easy to understand and the signals are well-defined.
Analyzing the Cloud
The cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots. The Leading Span A (green) and Leading Span B (red) form the cloud. The green line (Leading Span A) is the average of the Conversion Line (Tenkan-sen) and the Base Line (Kijun-sen). The Leading Span B (red)is formed by the 52-period moving average projected 26 periods in the future.
The Conversion Line (Tenkan-sen) is a 26-period moving average and the Base Line (Kijun-sen) is a 9-period moving average. The lagging span (Chikou Span) is the closing price of the current period projected 26 periods in the past.
While these settings are still preferred in most traditional markets, in cryptocurrency markets traders adjust Ichimoku settings to reflect the 24h markets and the most popular settings being 20,60,120,30.
What This Means?
There are two ways to identify the overall trend using the cloud. First, the trend is up when prices are above the cloud, down when prices are below the cloud and flat when prices are in the cloud. Second, the uptrend is strengthened when the Leading Span A (green cloud line) is rising and above the Leading Span B (red cloud line).
This situation produces a green cloud. Conversely, a downtrend is reinforced when the Leading Span A (green cloud line) is falling and below the Leading Span B (red cloud line). This situation produces a red cloud. Because the cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.
Chart 2 shows BNB/BTC with a focus on the uptrend and the cloud. First, notice that BNB/BTC was in an uptrend February as it traded above the cloud. Second, notice how the cloud, Tenkan, and Kijun offered support on several occasions.
Chart 3 shows AMB/BTC with a focus on the downtrend and the cloud. The cloud turned red because Leading Span A (green) moved below the Leading Span B (red) representing a major resistance in price since the breakdown. Notice how the different components of the cloud (Kijun, Tenkan, Leading Span A and B) then acted as resistance quite a few times in July.
How to trade with the Ichimoku Cloud
As you may have seen in the charts above, the Cloud and its components can help you identify the current trend and levels of importance, being able to tell when the trend has the strength to keep going or warn us about an upcoming change in the current trend.
Tenkan Cross Signals
Chart 4 shows AMB/BTC with a breakdown of the Cloud around May along with the huge downtrend that followed all the way to mid-August, where the price settled for a few months, this is where we received our signal of opportunity, the Tenkan crossed upwards the Kijun before the price entered the cloud warning us that there is an impending uptrend incoming.
The same rule applies to the opposite situation, if the Tenkan crosses down on the Kijun it indicates the end of an uptrend and confirms that the major downtrend inst over.
Cloud Breaks and Retest
Chart 5 TRX/BTC shows how the Tenkan cross isn’t the only golden rule when it comes to using this indicator to jump in a trade. Usually, when a coin starts going up we struggle to find a good spot to enter a position but the Cloud can help us out,when the price manages to break out of the cloud and finds support (or resistance) above (or below) we get one of the best ways to know that there is upside (or downside) left in the current run (depending on the direction of the trend).
This article features both bullish and bearish signals derived from the Ichimoku Cloud plots. In general, movements above or below the cloud define the overall trend. Once the trend is identified, the Kijun and Tenkan act similar to MACD for signal generation.
- Price action above the Cloud
- Cloud from red to green
- Tenkan crosses Kijun (up)
- Top of the Cloud acts as support
- Price action is below the cloud
- Cloud goes red
- Tenkan crosses Kijun (down)
- Cloud acts as resistance
The Ichimoku Cloud is a comprehensive indicator designed to produce clear signals. Once the trend is established, appropriate signals can be determined using the Cloud, Tenkan, and Kijun. The classic signal is to look for the Tenkan to cross the Kijun.
While this signal can be effective, it can also be a rare opportunity, as you would have to keep an eye on the coin for a long time even before a trend has been established.
The Ichimoku cloud is a great indicator on its own but it’s not flawless, try using an average of at least 3 indicators and different time frames to support your bias and always use a stop loss.