The term Ichimoku cloud comes from “Ichimoku Kinkō Hyō”, meaning something close to “one glance equilibrium chart”. Japanese journalist Goichi Hosoda built the system of cloud charts so traders could evaluate an asset or index by looking for specific trends. After testing it out for decades, Hosoda published his trading strategy in 1968.
Note: This is not financial advice, and is only meant to be an educational resource.
Ichimoku Clouds – Definition
Ichimoku Clouds represent a Japanese technical charting system used to spot trading trends.
Japanese stock market and commodities traders have long used this technique, with interest from Western traders picking up in recent years.
Ichimoku Cloud charts are used by traders to quickly assess and evaluate market trends. Using the charts, analysts are also able to gauge the momentum as well as support and resistance levels of a particular asset or index.
As a visual form of technical analysis, Ichimoku clouds serve two basic functions:
- Create a bird’s eye view of overall movements
- Distinguish a high probability from low probability trade opportunities
Elements of Ichimoku
Ichimoku charts have five different elements that are viewed together to provide one overall perspective on the current situation of an asset or index.
The 5 elements are as follows:
Tenkan Sen (Turning line)
This moving average measures the highest high and lowest low for the last nine days. Traders have used this element to measure short term momentum; it’s also interpreted similarly as with the short term moving average. If Tenkan Sen is steeply angled, a sharp recent price change or strong momentum is indicated. Flatter Tenkan Sen lines signal low to zero momentum. This Ichimoku element is normally used alongside Kijun Sen to determine the probability of future momentum.
Kijun Sen (Standard line)
As the second moving average in Ichimoku Cloud charting, this one measures the highest high and the lowest low for the last 26 trading days. Kijun Sen may also be called the baseline. It’s used in tandem with Tenkan Sen to measure momentum. Because it covers a longer period of time, traders may rely more on this line for spotting trends. A flat Kijun Sen signals a range-bound price while if inclined the baseline indicates a trend. The base line’s angle shows a trend’s momentum.
Senkou Span A (First leading line)
Senkou Span A is a moving average of two other elements – the Tenkan Sen and Kijun Sen, projected 26 days ahead. Also called the first leading line, Senkou Span A is used with Senkou Span B to formulate the Ichimoku Cloud or “Kumo”. It’s also used to indicate the probability of support and resistance levels in the future. Because Senkou Span A shifts forward, it gives a visual indication of how the price on one date relates to support and resistance from 26 days prior.
Senkou Span B (Second leading line)
This averages the highest high and lowest low for the last 52 days, plotted 26 days ahead. As the longest term represented in the Ichimoku trend analysis, time-shifting Senkou Span B forward provides a visual of how the price on a certain date acts in relation to support and resistance from the 52 trading days before. Used with Senkou Span A, the two lines form the outline of the Ichimoku Cloud (Kumo).
Also named the “Cloud”, the Kumo represents the area in between Senkou Span A and Senkou Span B. It constitutes the focal point of the Ichimoku system. When the price is over the Kumo, the top line indicates the first level of support, with the bottom line signaling the second support level. If the price is under the Kumo or Cloud, the bottom indicates the first level of resistance, with the top representing the second level.
Chikou Span (Lagging line)
This line represents the asset or index closing price for the last 26 days. The glance view shows how the price will compare to 26 days prior. An upward trend may be indicated if the Chikou Span is above closing price, and downward motion is signaled when the price is below it. Chikou Span is useful in confirming trends, momentum, and support and resistance that other Ichimoku elements may have uncovered.
Since three of the chart elements use averages of highest highs and lowest lows for specific periods of time, they collectively represent a mid-point of the price range during that period. Traders may use this to create a depiction of the trend, momentum, and support and resistance levels instead of just using closing price averages.
How to use Ichimoku Charts
Overall, the chart is best when viewed holistically, with all elements considered. It provides a way to determine the probability of opportunities and is less a way to predict price movements.
As UKSpreadBetting explains in his video on using Ichimoku Cloud indicators, the clouds can be glanced at and when they look a mess, there’s probably not an opportunity. On the other hand, when you see things line up, as explained further in the signals section below, it may be the time to trade a trend.
Ichimoku Cloud Signals
There are five sets of signals in the Ichimoku Kinko Hyo system. All five are described in detail below along with diagrams provided by IchimokuTrader.com.
The set up of this system includes all five elements together as an overall chart. The design requires that they are analyzed in tandem. In other words, one shouldn’t analyze them alone without the other elements. Since we are dealing with a technical trend trading strategy, the fact that trends can change must also be taken under advisement.
We describe the five signal groups in detail below. Some traders may view different elements as being stronger indicators than the others. But each is also affected by the strength (or weakness) of all the other elements. It’s important to remember that in this system, it is the overall chart that tells the most.
Tenkan Sen / Kijun Sen Cross
This signal occurs when the Turning Line (Tenkan Sen) and Standard Line (Kijun Sen) cross. Check the diagram to see both bullish and bearish trends:
Kijun Sen Cross
Kijun Sen Cross is a signal that the price has crossed the Kijun Sen, or Standard Line:
A Kumo breakout is a signal occurring when the asset or index price crosses or leaves the Cloud:
Senkou Span Cross
This cross signal happens when Senkou Span A and Senkou Span B cross.
Chikou Span Cross
The Chikou Span Cross happens when the Chikou Span goes above or below the price. If it’s rising when it crosses above the price, you have a bull signal. Conversely, if it’s falling when it crosses below the price, it’s a bear signal. The signal’s strength depends on the relationship between the price on the date of the signal and the Kumo.
It’s much the same when charting traditional assets vs. virtual currencies like Bitcoin. The biggest difference is that trading days are 24/7 for cryptocurrencies.
With the bitcoin halving happening in a matter of days, let’s take a look at one trader’s own Ichimoku chart for BTC/USD:
You can see the trend lines are neutral and neither above or below the Cloud, signalling neither a strong upward or downward trend for the given time period.
- The system of Ichimoku Cloud charts, in simplest terms, signals long only when price is above the cloud (buy signal), and signals short only when price falls below the cloud (sell signal).
- These technical indicators, which make up Ichimoku charts, give traders information about momentum and support and resistance levels.
- Ichimoku Clouds are visual representations that provide insight into where a price may find support or meet resistance at a future time.
- When Tenkan Sen and Kijun Sen go above the Cloud, it signals a positive trend. Conversely, when Tenkan Sen and Kijun Sen go below the cloud, the signal is for a negative trend.
- As Sendou A rises over Senkou B, it represents a strengthening uptrend. If it falls below Senkou B, it’s the opposite, indicating a strengthening downward trend.
We hope you’ve enjoyed learning about Ichimoku Clouds and how to use them to assess trend lines. At HedgeTrade, we love charts and will continue to build out our in-app charting tools as well as include more trading tips in our blog.