The Ichimoku Cloud is like a Swiss Knife indicator that suggests support/resistance, direction of momentum or trend, and alerts you when a buy or sell gets trigerred.
It is like a MACD, Multiple MA, mini Fibonnacci.
Though it looks visually complicated, it is a very simple indicator. In this tutorial, I will stick to the basics, avoid the Japanese lingo, and help you visually understand the signals without getting into a deep analysis.
The 5 Elements of the Ichimoku Indicator
Conversion Line: Think of it as a, more or less, 9 Day EMA
Base Line: Think of it as a, more or less, 26 Day EMA
Lead 1: Average of Conversion and Base Lines
Lead 2: Average of (52-period high + 52-period low)
Lagging Span: Current price, plotted 26 periods in the past so that traders can view the exact current price while analyzing the other elements of the Ichimoku. Also, this somehow plays a role in shifting the cloud forward by 26 periods.
Understanding the “Cloud” in the Ichimoku Indicator
Study the image above. You will see two peculiarities:
1. That the area between lines Lead 1 and Lead 2 is either shaded light red or light green
2. That the cloud extends much beyond the current price (extends it by 26 periods).
A light green cloud is formed when Lead 1 Crosses Lead 2 (the shorter average shooting above the longer average) and a light red cloud is formed when Line 2 pierces Line 1 (the longer average falling below the shorter average).
(2) is extremely important because it helps traders determine future levels of support or resistance. It works like a Fibonacci levels indicator as you will figure out when you are done with the article.
Obviously, you’d have figured out that the red cloud denotes bearishness and the blue cloud indicates bullishness. That is ok, but there is a certain method of analyzing the Ichimoku.
Setting Up the Ichimoku Indicator
I’ve used the following colour codes:
Conversion Line – Red
Base Line – Blue
Lagging Span – Pink
Lead 1 – Green
Lead 2 – Orange
How to Interpret Buy and Sell Signals Using the Ichimoku Cloud
CONVERSION LINE CROSSES BASE LINE UPWARDS: Bullish for traders or investors depending on the time period you are using. If you use 15m-1 hour candles, the signal can hold good for 1-2 days, and longer if you use a longer period.
WHEN PRICE CROSSES CONVERSION LINE UPWARDS: This is a clear bullish signal. However, the price should hold for 1-2 candles above the conversion line before you make any trade.
CONVERSION LINE CROSSES BASE LINE DOWNWARDS: Bearish for traders or investors depending on the time period you are using. If you use 15m-1 hour candles, the signal can hold good for 1-2 days, and longer if you use a longer period.
WHEN PRICE SLIDES BELOW BASE LINE: This is a clear bearish signal. However, the price should hold for 1-2 candles below the Base line before you short the stock.
How to Interpret Trends Using the Ichimoku Cloud
When the price is above the cloud, the stock is in an uptrend. If the cloud is green when the price is up, it implies that the uptrend is strong. If the cloud is red, it implies the uptrend is weak.
When the price is below the cloud, the stock is in a downtrend. If the cloud is red when the price is down, it implies that the downtrend is strong. If the cloud is green, it implies the downtrend is weak.
NO TREND (In a range)
The rangebound phase is triggered the prices move inside the cloud.
How Ichimoku Cloud Sets Support and Resistance Levels
Lead 1 and Lead 2 act as support (if the price is above the cloud) and resistance (if the price is below the cloud).
How Ichimoku Cloud Sets FUTURE Support and Resistance Levels
One solid advantage of Ichimoku is that it sets future support and resistance levels by plotting lines Lead 1 and Lead 2 twenty-six periods into the future. The following examples will help you understand how to interpret these.
EXAMPLES THAT WILL HELP YOU UNDERSTAND HOW ICHIMOKU CLOUD WORKS
A. NIFTY 1-DAY ICHIMOKU (Note that the trend can change as prices reverse):
A. NIFTY 1-DAY ICHIMOKU (early 2017):
A. NIFTY 1-MONTH ICHIMOKU (current):
Well, that’s about it. Practice it a few times and I’m sure you will find it immensely helpful like I do.
This topic suggested by:
Trading strategies on ichimoku cloud system.
— Neeraj Gupta (@noob_neeraj) April 1, 2018