Ichimoku Cloud – A Practical Ichimoku Cloud Guide
Ichimoku cloud is an indicator which helps us to understand dynamic supports and resistances.
This indicator is based on five moving averages, and the relations between them produce Ichimoku cloud which can give us proper entry/exit signals for a trade.
Ichimoku cloud is also called Ichimoku Kinko Hyo and it’s first invented by Goichi Hosoda who was a Japanese journalist. He introduced this indicator in his 1969 book.
Ichimoku Cloud Formula
Ichimoku cloud consists of five segments, and If you understand the relations between them, you can easily interpret its meaning.
We wrote the formulas with generic parameters, and we’ll define precise numbers or settings that you should use for Ichimoku cloud further.
1. Tenkan-Sen (Conversion Line) – Faster
Tenkan-sen is the faster moving average, and its formula is: (x-period high + x-period low)/2
2. Kijun-Sen (Base Line) – Slower
Kijun-sen is just another Moving average, and its formula is: (y-period high + y-period low)/2
Which is y>x and it shows us that Tenken-Sen (Base Line) is moving slower than Kijun-Sen (Conversion Line).
3. Senkou Span A (Leading Span A) – Faster
This is the average of Base Line and Conversion Line, and its formula is: (Conversion Line + Base Line)/2
Senkou Span A (Leading Span A) forms the faster boundary of the cloud, and it’s a leading span because it is plotted y periods in the future.
In other words, we plot Senkou Span A number on the right side of the chart.
4. Senkou Span B (Leading Span B) – Slower
Senkou Span B (Leading Span B) is the average of the 2y periods high/low range, and its formula is:
(2y-period high + 2y-period low)/2
Senkou Span B forms the slower boundary of the cloud, and it’s a leading span because it’s plotted y periods in the future.
Like the last section, we plot Senkou Span B number on the right side of the chart.
5. Senkou Chikou Span (Lagging Span)
Chikou Span is a lagging MA, and it’s close plotted y periods in the past. This line helps us to know where recent candlesticks closed and also, where current support/resistance areas are placed.
Ichimoku Cloud Settings (Inputs)
When you want to adjust settings of the Ichimoku cloud in your trading platform (Thinkorswim, Ninjatrader, Tradingview, etc.) you should enter standard numbers for each of them.
Generally, we have two main settings for this indicator.
- Single settings (default mode)
- Doubled settings
which latter is used extensively by cryptocurrency traders. Josh Olszewicz who also is known as “Ichimoku guy” in the crypto community suggested these settings.
Ichimoku Cloud Default Settings
Goichi Hosoda, Inventor of Ichimoku cloud trading system, assumed markets are open 9 to 5 and 26 days each month. By this assumption, he set inputs of his indicator like this: (9,26,52,26)
Ichimoku Cloud Double Settings
In order to prevent from bad entry/exit signals or fakeouts, some pro traders suggest using double settings. In this way, we reduced our risk and increased our success probability.
Moreover, because the cryptocurrency market is open 24/7, crypto traders believe doubled settings are suitable for cryptocurrency charts. So, they tend to round the default numbers and double it for their trading.
In other words, the Ichimoku double settings for crypto traders would be (20,60,120,30).
How to Trade Ichimoku Cloud?
It’s not hard to understand the relation between the price and the Ichimoku cloud. However, The bullish or bearish entry signals depend on a few specific rules.
Meanwhile, whenever you want to use Ichimoku cloud trading system you must consider these general rules:
- Green Ichimoku cloud is a bullish sign
- If candlesticks are above the Ichimoku cloud, it means bullish momentum
- If Ichimoku cloud is below the candlesticks, it acts as a support
- Red Ichimoku cloud is a bearish sign
- If candlesticks are below the Ichimoku cloud, it means bearish momentum
- If Ichimoku cloud is above the candlesticks, it acts as a resistance
- If the price is ranging in the cloud, it means no trading zone
Ichimoku Cloud Bullish Signal
In order to enter a long position with the Ichimoku cloud, you should pay attention to these four steps:
- Price position relative to the cloud: The price must go above the cloud (Kumo breakout)
- Bullish cloud: Further cloud must be bullish (green)
- TK cross: the Conversion Line (Tenken) should crosses above the Base Line (Kijun). It’s like the golden cross, and the faster MA crosses above the slower MA.
- Lagging span position relative to the cloud: lagging span must go above the cloud.
We’ll explain these steps through below examples.
Ichimoku Cloud Crypto Example (Bitcoin Chart)
We analyzed the bitcoin chart on the 1h time frame. We waited to TK cross happen (the Conversion Line (Tenken) crossed above the Base Line (Kijun)), then we saw the price and lagging span went above the cloud.
Accordingly, as the cloud was bullish, we put our buy order when the price retraced to a support level.
We stayed in our long position until the Conversion Line crossed below the Base Line. Also, we could exit sooner at higher prices, but for the sake of simplicity, we acted that way.
If you want to have a better exit point, you should check out higher time frames supports and resistances.
Ichimoku Cloud Forex Example (EUR/USD Chart)
In the Second example, we analyzed the daily EUR/USD (Euro/US Dollar) chart in the Forex market.
Again, we waited to TK cross occur (the Tenken (Conversion Line) crossed above the Kijun (Base Line)), then we saw the price and lagging span went above the cloud.
So, as the cloud was bullish, we used the pullback trading technique and put our buy order where the price retraced.
We stayed in our position until the price reached an important resistance level. We closed it subsequently and waited for another proper entry signal.
According to those four steps, We entered a long position again. However, we didn’t follow the exact steps because we had a main resistance above us.
Therefore, we waited for the price pullback and opened a long position at the bottom of the resistance area.
Finally, we exited from our second trade after the price reached to the next resistance level.
Ichimoku Cloud Bearish Signal
Before entering a short position with Ichimoku cloud you should consider these four steps:
- Price position relative to the cloud: The price must go below the cloud (Kumo breakout).
- Bearish cloud: Further cloud must be bearish (red)
- TK cross: the Conversion Line (Tenken) should crosses below the Base Line (Kijun). It’s like the death cross, the faster MA crosses below the slower MA.
- Lagging span position relative to the cloud: lagging span must go below the cloud.
Like the last section, we’ll explain these four steps through two bearish examples.
Ichimoku Cloud Stock Example (Facebook Chart)
We analyzed the Facebook price chart in the stock market on the 4h time frame.
We waited for faster MA (Conversion Line or Tenken) to cross below the slower MA (Base Line or Kijun), then we saw the price and lagging span went below the cloud.
Hence, Ichimoku cloud was bearish we shorted the pullback. Also, We had two options for closing the short position.
- We could close it in the important support area,
- or we could wait for the Conversion Line to touch the Base Line.
Maybe you think we could have stayed in the short position and closed it whenever TK cross happen. However, you should always consider market momentum and overall price action.
We were in oversold region at multiple time frames and price correction could happen at any moment. So, we decided to lock our profit and exit the position.
Ichimoku Cloud Forex Example (GBP/USD Chart)
We analyzed GBPUSD (Pound sterling/US Dollar) Forex chart on the 4h time frame.
We waited for the faster MA (Tenken or Conversion Line) to cross below the slower MA (Kijun or Base Line), then we saw the price and lagging span went below the cloud.
Right after the price broke the support area, we shorted the retracement, while considering the bearish cloud.
We had three options for closing the short position:
- When price reached that important support level, we could exit the position.
- Later, while the price was ranging and Conversion Line came close to Base Line, we could close the trade.
- Finally, when TK cross happened, we could close our short position.
Ichimoku Cloud Strategy
What we wrote in the above sections were just a general entry/exit trading signals. There are some specific Ichimoku cloud trading strategies that can give you new ideas about the potential of this indicator.
Ichimoku Cloud Edge to Edge Strategy
The edge to edge is quite a simple Ichimoku cloud strategy, though it needs some requirements for successful results.
According to this strategy, whenever candlesticks entering a cloud and price closed in that cloud, the price will touch or pass the other edge of the cloud.
Actually, it’s not a complex strategy, but in order to rely on it, you should first check the history of edge to edge strategy on your chosen chart.
We looked for this strategy in different markets and we found out Netflix stock chart followed it quite well.
In the below image you see Netflix chart on the 2h time frame. When you check the edge to edge strategy on this chart, you’ll find out win rate of 13 out of 15 and this equals to 86%!
Also, we should mention that we used Ichimoku cloud with double settings for being conservative.
Ichimoku Cloud Kijun Bounce Strategy
Kijun bounce is an interesting Ichimoku cloud strategy which is similar to some moving averages trading strategies.
When we have a uptrend/downtrend on any security, price tends to touch the Kijun (Base line) and continue its trend again.
So we have two case in here:
- During an uptrend or a bullish market you should put your buy orders on the Kijun (Base line) in hope for a bounce to upside.
- During a downtrend or a bearish market you should put your sell orders on the Kijun (Base line) in hope for a bounce to downside.
We analyzed Kijun bounce strategy in the epic uptrend of bitcoin in 2017. We looked at the 4h time frame chart, and we realized during this uptrend bitcoin price touched Kijun (Base line) five times.
Ichimoku Cloud C Clamp Strategy
C clamp strategy is somehow similar to the Kijun bounce strategy.
According to this Ichimoku cloud strategy, whenever the gap between the Conversion line (Tenken) and the Base line (Kijun) increases so much, we’ll have a price correction to fill that gap.
The name of this strategy came from the shape of the clamp tool. In fact, the shape of the gap between Kijun and Tenken is quite similar to clamp’s head.
C clamp strategy helps you to prevent:
- Opening a long position in the overbought regions.
- Opening a short position in the oversold regions.
C clamp is not a mind-blowing strategy and you can also detect these kinds of divergences with help of other indicators like RSI too.
In the below image we looked at Amazon stock chart on the 3h time frame. Obviously, as the gap between the Conversion line and the Base line increased, we had a price correction to fill it.
Ichimoku Cloud and Fibonacci Retracement
There is an interesting relation between the Ichimoku cloud indicator and Fibonacci retracement levels.
whenever an uptrend or downtrend happens, you’ll see a long horizontal line form on the cloud (Kumo). Indeed, If you draw a Fibonacci line from start to end of that trend, you’ll realize they’re aligning at the 0.5 Fib level.
In the below image we represented an uptrend in Ethereum chart and we showed how 0.5 Fibonacci level relates to the Ichimoku cloud.
What is Ichimoku Cloud Kumo Twist?
When you’re using a trading indicator, you should remember backtesting is very different from live trading or forward testing.
In fact, If you do a Ichimoku cloud analysis on historical data of a chart, you’ll see obvious changes in the bullishness or bearishness of the clouds. but in live trading, it’s not like that.
No matter what time frame your looking at, There are times in trading when there is no trend in the market and price just ranges for a while.
In those moments cloud momentum will change and you don’t know exactly whether the next cloud is bullish or bearish.
Kumo twist means changing of the Ichimoku cloud momentum. in other words, it means green cloud turns to red or vice versa.
while you’re using the Ichimoku cloud in live trading, you should sometimes wait to see what the momentum of next cloud is, because it helps you to understand the price trend.
In the below example, you see how Facebook stock price fluctuations caused Kumo twist.
Ichimoku Cloud for Day Trading and Swing Trading
Many people ask whether if Ichimoku cloud is suitable for day trading/swing trading or not?
the answer is: it depends on what time frame you’re going to trade on!
this trading indicator can be used for both day trading and swing trading; however, in the lower time frames clouds have many Kumo twists and it’s full of mixed signals.
like other indicators, when you trade them on higher time frames the win rate is going to increase substantially. because in higher time frames data has less noise and trend is more predictable.