Technical Analysis

Ichimoku Clouds

The Ichimoku Cloud is a form of technical analysis that was developed by a Tokyo newspaper writer in the 1960’s.

The cloud patterns of Ichimoku give you an instant idea on trend and direction in the markets. It uses moving averages to define support and resistance zones, identifies trend and direction and also helps to gauge momentum of price action.

Ichimoku not only uses the cloud to define support and resistance but it also uses the Kijun, Tenkan and Chikou lines that are very similar to moving averages and can help to provide bullish or bearish forward indicators.

Sometimes beginners can ignore the cloud, but this is a mistake. Although Ichimoku analysis may look complex, once you grasp the basic concepts associated with using the indicator it is relatively simple to use.

Learning the Cloud

Initially, start off by learning the names associated with the indicator:

  • Senkou Span A: (tankan + kijun)/2, pushed 26 periods ahead and top of cloud.
  • Senkou Span B: (highest high + lowest low)/2, for the previous 52 periods, pushed 26 periods ahead and base of cloud.
  • Tenkan line: 9 period EMA
  • Kijun line: 26 period EMA
  • Chikou line: Today’s closing price plotted 26 periods behind.

The top and the base of the cloud act as support and resistance, but the cloud itself also determines trend: above the cloud is considered a bullish signal, below the cloud is bearish and within the cloud there is no prevailing trend.

Ichimoku Cloud

IchMain

Source: FOREX.com

The tankan and Kijun lines are also useful support and resistance levels and they can be used to determine bullish or bearish signals and their associated strengths.

Bullish Signals using Ichimoku analysis:

Strong

  • Price action is above the cloud
  • Tenkan crosses above the kijun line and it must occur above the cloud
  • Chikou is also above the cloud

Medium

  • Price action is still above the could
  • Tenkan crosses above the kijun but this time it occurs in the cloud
  • Chikou is above the cloud

Weak

If price action is below the cloud and if none of the above occurs then the signal could be weak, for example, if the tenkan crosses below the kijun when it is above the cloud even if the chikou line is above the cloud it suggests the bullish trend may be weakening.

Example: strong bullish signal

IchBull

Source: FOREX.com

Bearish Signals

Strong

  • Price action is below the cloud
  • Tenkan crosses below the kijun line and it occurs below the cloud
  • Chikou is below the cloud

Medium

  • Price action is below the cloud
  • Tenkan crosses below the kijun and it occurs in the cloud
  • Chikou is below the cloud

Weak

If none of the above occurs then the signal could be weak, for example: tenkan crosses over kijun from above and it occurs below the cloud and the chikou is below the cloud, but price action is above the cloud.

Example: strong bearish signal

IchBear

Source: FOREX.com