Traders in search of the “holy grail” are striving to find trading strategies which would maximize their profits and minimize their risks. New strategies and indicators appear regularly, but some traditional ones have not lost their relevance over time and are now considered classics. We are talking about the Ichimoku Cloud indicator. Read on to learn what this indicator is, how it works and how to benefit from Ichimoku.
What is Ichimoku Cloud?
Ichimoku Kinko Hyo, or simply Ichimoku, is a universal technical indicator developed in the 1940s by Japanese journalist Goichi Hosoda. However, traders around the world use the term “Ichimoku Cloud” more often due to the looks of the indicator.
Ichimoku Kinko Hyo is Japanese for ‘balance at a glance’, which accurately describes the essence of the strategy: a single look at the chart is enough for the trader to see a clearer picture and make a confident next step.
Ichimoku relates to impulse indicators; it determines how intense the price movement is. It has gained the status of a classic indicator and has become well known and actively used by traders around the world. This is what an Ichimoku Cloud looks like on a chart:
It is clear why this indicator is called the “Ichimoku Cloud.” We can see three lines resembling moving averages (MA) and the cloud itself on the chart.
The purpose of the Ichimoku indicator
The Ichimoku cloud is a multifunctional indicator, which is applicable to a range of cases. It is not surprising that its creator was Japanese. It’s history dates back to the 1860’s, when the Japanese rice traders on the stock exchange invented the — candlesticks to display prices on charts.
The Ichimoku Kinko Hyo displays three indicators on the price charts:
- Price momentum (intensity of price fluctuations );
- Support and resistance zones;
- Trend direction.
The Ichimoku cloud consists of 4 components:
- Tenkan-Sen — blue line;
- Kijun-Sen — red line of local maximums and minimums (High/Low);
- Chikou Span — brown (or green) line;
- Kumo — cloud.
Let’s go through the meaning of each component:
This is the first line of the Ichimoku indicator, marked blue on the chart. Tenkan-Sen is also called the conversion line. This line represents the average value of the price maximum (High) and minimum (Low) readings over the past N candles. As a rule, the default setting is set at a 9-day period.
The 9-day Tenkan-Sen is almost similar to the 9-day Simple Moving Average (SMA), but it is less smooth. The peculiarity of Tenkan-Sen is that the line indicates whether there is a distinct trend: when the price is following a “flat” pattern, the indicator is flat as well.
But when the Tenkan-Sen line is moving, it represents the price movement over the 9-day period, which distinguishes Ichimoku from the SMA indicator. The advantage of the Tenkan-Sen line is that it indicates the support/resistance levels and the trend direction at the same time. This factor increases the versatility of this indicator.
Kijun-Sen (marked red) is called the baseline. Similar to Tenkan-Sen, the baseline is calculated from the average value of lows and highs over the last period, the difference between them being that the period of Kijun-Sen is longer — 26 days.
This is a line that displays the price with a specified lag. By default, the period is set to 52 days. Chikou Span indicates whether there is a distinct trend on the market. The Ichimoku cloud signals the direction of the trend when the Chikou Span moves in either direction.
This cloud itself is the culmination of Ichimoku Kinko Hyo and the very “grail” that will make you a true samurai in crypto trading. Kumo determines the equilibrium between support and resistance, while taking into account price dynamics during previous periods. The longer the period of using it , the more accurate the buy and sell signals will be.
The cloud is divided into large green and red zones, which indicate either an uptrend or a downtrend, respectively. Kumo belongs to so-called “leading indicators”. If you look at the chart, you will notice that the Ichimoku Cloud is far beyond the last candle.
Surprisingly, the most important thing is neither the color of the cloud nor the direction of the price, but the area where the movement is taking place. Traders will avoid assets when their price oscillates within a cloud.
Notice that when the price action was in the cloud, there was no clear trend on the Bitcoin chart. But as soon as the price moved outside the Kumo, a strong trend emerged — that’s how the Ichimoku Cloud works.
Ichimoku Cloud strategies
Let’s dive right into the most valuable part. One of the first popular strategies among traders is to act on the conversion line (Tenkan-Sen) crossing the baseline (Kijun-Sen), similar to the moving average (MA) cross.
How it works
When the Tenkan-Sen (blue line) crosses the Kijun-Sen (red line) upwards, traders open a long position (Long). If, on the contrary, the blue line goes below the red line, we can expect a reversal and a price drop, which implies a sell signal. Examples are illustrated below:
Though the strategies using a number of components are more fundamental, practice calls to test different options to see what works best.
It is enough for a trader to look at the Ichimoku indicator to understand the potential price movement, whether there is a trend, the price resistance or support levels. That’s why the indicator is considered to be universal. The most reliable buy signals appear when the lagging Chikou Span line breaks above the Kumo cloud. The reversal pattern indicates that a bearish sentiment prevails in the market. Let’s have a look at the chart:
The green line breaking through the blue one in a downwards direction is a signal to stop trading. This is the moment when you need to consider several strategies and trade signals.
Traders take price movements above or below a cloud similarly. Such movements can indicate either an uptrend or a downtrend.
Pros and cons
Ichimoku Cloud pros
Versatility. The indicator can be used to detect trends, determine their direction, support and resistance levels and the intensity of price dynamics.
Simplicity. Ichimoku Cloud can be easily automated with 3commas.io bots. The indicator is very easy to use, whether you are a beginner or a professional trader.
Compatibility. The Ichimoku Cloud indicator is combined with other simple indicators such as MA, MACD, RSI and others. A comprehensive approach will eliminate unnecessary noise in trading and increase the accuracy of trading signals.
Ichimoku Cloud cons:
Variety. For beginners, it may be easy to get confused at first in terms of reading the signals and what the components stand for. This can lead to trading mistakes.
Congestion. Too many lines can be confusing to inexperienced traders. However, this is an easy fix. If you are just getting acquainted with the indicator, you can try different strategies using the lines or the cloud exclusively. This way, you will gradually learn the principles of the indicator and test the strategies.
The Ichimoku Cloud indicator can turn a trader into a real crypto samurai. Traders will find many uses for the strategies based on the Ichimoku Cloud. Furthermore it is easy to combine a range of indicators and utilize them with automated trading with bots.
Disclaimer: The contents of this article are not intended to be financial advice and should not be treated as such. 3commas and its authors do not take any responsibility for your profits or losses after you read this article. The article has been presented to provide readers with general information. There is only personal experience described herein. The user must do their own independent research to make informed decisions regarding their crypto investments.