- The ichimoku cloud indicator consists of five components, each of them stating information about price actions.
- One should understand each component of it and then trade.
- When the prices are above tenken then the trend is bullish and when the prices are below then the trend is bearish.
- If the prices and tenken is above kijun sen then it indicates that the prices are in uptrend and if the prices and tenken is below kijun sen then it indicates that the prices are in downtrend.
- While trading one should know see that the chikou span is not facing any obstruction of candlesticks or kumo clouds and it is free to move in any direction uptrend or downtrend.
- If Senkou A is above Senkou B then it is bullish kumo and If Senkou A is below Senkou B then it is a bearish kumo.
|Table of Contents|
|What does the Ichimoku cloud tells you?|
|Components of Ichimoku clou|
|Trading Strategies using ichimoku indicator|
|Limitations of Using the Ichimoku Cloud|
|Should Newbie Traders us the Ichimoku Cloud?|
The Ichimoku cloud indicator looks complex when we first apply it to our technical charts as it has too many components.
But when you understand its components and how to use this indicator then Ichimoku cloud is very helpful to identify resistance, supports and trends.
The ichimoku cloud is a technical indicator which tells you everything about the price trends like momentum, direction, volatility, support, resistance and potential reversals.
So this indicator can be termed as “All in one” indicator.
Ichimoku indicator was released in the book published by Goichi Hasoda, a Japanese journalist.
What does the Ichimoku cloud tells you?
This indicator tells us relevant information about the price movement of the stock in a glance.
When the price is above the cloud then the overall trend is bullish and when the price is below the cloud then the overall trend is bearish.
When Leading Span A is above Leading Span B and rising, then it confirms the uptrend and space between the lines are green.
Similarily when Leading Span A below Leading Span B and falling, it confirms the downtrend and space between the lines is red.
Traders will often use the Cloud to find the levels of support and resistance.
The support and resistance levels that can be projected into the future by using this indicator.
Components of Ichimoku cloud:
This indicator consists of five components, each of them stating information about price actions.
Let us first discuss about the components of Ichimoku cloud:
1. Tenken Sen
This is 9 days moving average line which shows the middle value of highest and lowest points on the charts of the last 9 days.
This is a leading indicator and move rapidly with the increase or decrease in the price.
This is the first line of support when the prices move in uptrend and the first line of resistance when the prices move in downtrend.
The formula for calculating this line is:
[(9-period high + 9-period low)/2].
When the prices are above tenken then the trend is bullish and when the prices are below then the trend is bearish.
2. Kijun Sen
This is 26 days moving average line which shows the middle value of highest and lowest points on the charts of the last 26 days.
As this line moves slower than tenken due to larger number of period, we can see flatness in some areas. This flatness can be considered as support and resistance for the prices.
This is also a critical level of support in uptrend and resistance in downtrend.
If the prices and tenken is above kijun sen then we can say the prices are in uptrend and if the prices and tenken is below kijun sen then we can say the prices are in downtrend.
When kijun is flat then it indicates that the market is in consolidation and attracts the prices towards it like a magnet.
As both tenken sen and kijun sen are moving averages, the bullish crossover occurs when tenken sen cuts kijun sen from below and bearish crossover occurs when then tenken sen cuts kijun sen from above.
The formula for calculating this line is:
[(26-period high + 26-period low)/2].
3. Chikou Span
Chikou span is a lagging indicator and it plots the closing price 26 periods back.
While trading one should know see that the chikou span is not facing any obstruction of candlesticks or kumo clouds and it is free to move in any direction either uptrend or downtrend.
4. Senkou Span A
It is a leading indicator which is plotted 26 periods ahead.
It is calculated from last 26 periods by taking the midpoint of tenken and kijun.
This indicator is mostly slanting along with the prices and it does not remain flat as it takes small period in its calculation.
Senkou Span A forms the first part of Kumo cloud. If prices are above this, then it acts as a support and when the prices are below the prices then it acts as the resistance.
It is calculated as:
[(Tenken Sen + Kijun Sen)/2]
5. Senkou Span B
This indicator is calculated by taking the midpoint of the last 56 periods.
As it takes long period for calculation it is flat for most of the times can be taken as the line of support when the prices are above it and can be taken as the line of resistance when the prices are below it.
This is the second part of the Kumo cloud.
It is calculated as:
[(52-period high + 52-period low)/2]
6. The Cloud (KUMO)
Kumo is the Japanese name for the cloud and it is region between Senkou A and Senkou B.
If Senkou A is above Senkou B then it is bullish kumo and If Senkou A is below Senkou B then it is a bearish kumo.
When we combine all the indicators above then we get Ichimoku cloud as seen in the chart below, each indicator telling us some information about the price movement as discussed above.
Trading Strategies using ichimoku indicator:
Now that we know about the each and every component of Ichimoku cloud, let us discuss some bullish and bearish strategies using this indicator:
Bullish Trading Strategy:
For determining if the prices are in uptrend, there are certain Ichimoku cloud criteria one should follow:
Criteria for uptrend:
Prices should be above Tenken and Tenkun should be above kijun.
Both Tenken and Kijun should be moving upwards along with the prices.
Kijun should be not too far from the price.
Future Kumo should be bullish
Prices should be above kumo.
Let us take an example of how trade a stock when it is in uptrend using ichimoku cloud:
Let’s discuss how could we have traded the uptrend in the monthly chart of Maruti Suzuki ltd for long term.
We can see in the chart that till point A, the prices were in the consolidated zone and there was also no specific order of Tenken and Kijun so we should avoid this zone for trading.
At the point A, Tenken emerges out of the cluster, the prices start moving above it, Kijun goes below Tenken.
We can also see that there is no obstruction of price bars or kumo clouds for the Chikou to move up.
There is also a future Bullish Kumo cloud.
As all the uptrend criteria are met, we can expect the price to move uptrend from the consolidated zone.
Then at the point B, we see that there is huge gap between the prices and Kijun.
Kijun also remains flat and can attract prices towards it. So we should be cautious at this point.
At the point C, we can see how prices have fallen towards Kijun and taken a support there.
Here the Kijun Sen acted as the line of support and price didn’t break kijun, so we should continue holding our position.
The prices again reversed from the little fall and continued moving upward which was indicated by the future bullish kumo cloud.
The prices kept moving upwards, with tenken below it and kijun below tenken, chikou having no obstruction and the future kumo continued to be bullish till the point D.
At the point D, we can again see a huge gap between the prices and Kijun Sen.
So it’s time to be cautious again.
Kijun Sen attracted prices towards it and eventually the prices break this line.
At the point E, there is a bearish crossover, when kijun sen overtakes tenken sen from below.
It’s better to close our buy position at this point as the chikou also starts moving down and eventually may face obstructions from the price bars.
Bearish Trading Strategy:
For determining if the prices are in downtrend, there are certain Ichimoku cloud criteria one should follow:
Criteria for downtrend:
Prices should be below Tenken and Tenkun should be below kijun.
Both Tenken and Kijun should be moving downwards along with the prices.
Kijun should be not too far from the price.
Future Kumo should be bearish
Prices should be below kumo.
Let us take an example of how trade a stock when it is in downtrend using ichimoku cloud:
From the above chart of Yes bank the ichimoku cloud made so clear that the stock is still in downtrend
Whereas the investors kept buying this stock in different levels hoping for the prices to bounce back.
Let us discuss in details:
The stock price started declining from the point A, when the Tenken Sen cut Kijun Sen from above indicating bearish reversal.
We can also see that chikou may face obstruction from the price bars below it as marked in the chart which indicates that the prices may range bound.
At the Point B, we can see Kumo cloud turning bearish due to the gap down opening and big red candlestick indicating more downside.
Chikou also have no obstruction and it is free to fall.
The downside continues and at the point C we can see that the gap between Kijun Sen and price bar has increased which means that the prices can move up towards Kijun
Prices did move up but it did not break the resistance of Kijun Sen and it bounced back the resistance and continued to fall down.
If the prices had broken resistance of Kijun Sen then we could have expected bullish reversal.
Again at the point D, we can see how gap was formed between kijun sen and prices and it again did not break resistance of kijun sen and continued to fall down.
The situation is same also at the point E and still it the prices continued to fall down.
This is how Ichimoku cloud indicated that the stock is still in downtrend and one should not buy the stock unless it shows some kind of bullish reversal.
Limitations of Using the Ichimoku Cloud :
Below are some limitations of Using the Ichimoku Cloud:
- As this indicator has too many components, it becomes difficult for the trader to analyze the stock.
- It is based on the historic data whereas the two of the data points are plotted in the future.
- As the price remain above and below the cloud for a long time, the cloud may become irrelevant for a longer period of time.
Should Newbie Traders us the Ichimoku Cloud?
As a newbie, this indicator is difficult a bit. Thus they should avoid using this indicator.
They could start with candlesticks and one or two indicators as it will be difficult for them to understand all of the rules and setups required for trading with Ichimoku.
As a new trader, you should first understand the market volatility and basic chart pattern.
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