The Ichimoku Cloud is an indicator developed by Goichi Hosoda and described in his book published in 1969. This technical indicator is also known as the Ichimoku Kinko Hyo which means “one look equilibrium chart”. Is one peek at the chart enough to comprehend what is going on in the market? Read today's article and you will learn all you need to know about this interesting indicator.
The Ichimoku Cloud on IQ Option
There are plenty of indicators available on the IQ Option platform. The Ichimoku Cloud is the one with multipurpose use. It does not only help in recognising the trend and support and resistance levels, but also in catching the momentum and getting trading signals. You may think the Ichimoku Cloud is quite confusing when you look at it for the first time, but when you get to know it closer you will discover it is really not.
Adding the Ichimoku Cloud to the IQ Option chart
You must be logged in to your trading account. Choose the instrument for the session and then click on the Chart analysis icon on the left side of the platform. Select the Trend group of indicators under the Indicators tab. The Ichimoku Cloud name will appear on the list. Click it and it will be added to your chart.
As with any other indicator, the Ichimoku Cloud comes with its settings. You can leave them as default or you can play with different values. Anyway, there are 5 plots that form the Ichimoku Cloud indicator from which 4 are based on the average of the high and low over a specific period of time. I want to remind you that this indicator was described before the computer era and calculations on the high-low averages were easier to make than on the moving averages.
Tenkan or the Conversion line is the fastest and most sensitive of all. It has a period of 9 which means that on a daily chart the Tenkan is the midpoint of the 9-day high-low range.
Kijun or the Standard line has a period of 26. You can easily find a similarity between the relation of the Conversion line and the Standard line to that of 9-day and 26-day moving averages.
Senkou Span B or Cloud's 2nd line creates together with another line a cloud. This other line is the Conversion line added to the Standard line and divided by 2. It forms the faster boundary of the cloud. The Senkou Span B is slower and is based on 52-period high added to 52-period low and then divided by 2.
General offset is of value 26 which means is determined based on the past 26 days.
The cloud readings
I have mentioned that the Ichimoku Cloud enables you to identify the trend. To do that, you ought to consider the relation between the prices and the cloud. Whenever the prices are developing below the cloud, you can assume there is a downtrend. In the opposite situation, that is the prices are over the cloud, there is an uptrend.
To confirm the trend direction analyse two boundaries of the cloud. The 1st cloud's line should decline below the Cloud's 2nd line and together they create a red cloud when there is a downtrend in the market. They form a green cloud and the 1st line rises above the Cloud's 2nd line during the uptrend.
You can also determine the future support and resistance levels with the cloud as it is 26 days ahead.
Below you will see an example of the EURUSD currency pair with the Ichimoku Cloud attached and resistance levels marked.
The cloud changes the colour and two boundaries of the cloud cross each other when the trend changes its direction. Consider the example for the uptrend below. The cloud is green and the 1st line rises above the Cloud's 2nd line. Moreover, the cloud reveals the support levels.
The cloud gives a visual indication of the direction of the trend and support and resistance levels. Remember that it is advisable to trade along with the trend as the signals are more powerful then. So seek buying opportunities when the cloud is green and the prices are over it and sell when the cloud changes its colour to red and the prices are below it.
Selling and buying signals produced by the price and the Standard line crossovers
If you wish to enter a short trade, the first thing is to make sure there is a downtrend that is the prices lie below the cloud which is red in colour. The second thing you are waiting for is the crossover of the price with the Standard line. The price bounces above the Standard line just to cross it and continue downwards. You have just received a signal to sell.
You want to buy during the uptrend so the prices should be above the cloud and the cloud should be green. Now, look at the prices and the Standard line. They were formed below the line but at some point, they break the Standard line and continues above it. This is a good moment to open a long trade.
Selling and buying signals produced by the Conversion and Standard lines crossovers
You are seeking selling opportunities during the downtrend. The cloud should be red and the prices below it. Now, check the relation between the Conversion and the Standard lines. The first one should cross the second one from above and continues beneath. This is a signal to sell.
First, make sure the market is in the uptrend. The prices should be above the green cloud. Then look at the Conversion and Standard lines. A signal to buy is produced when the Conversion line intersects the Standard line on its way up and moves further above it.
As you can see there is a lot of information you can get from a single indicator called the Ichimoku Cloud. You will catch the direction of the trend with only one glimpse at the chart. The colour of the cloud and its position in relation to the prices will indicate whether the market is in the uptrend or downtrend. Moreover, you will be able to recognise the future support and resistance levels.
Trading signals are also produced by the Ichimoku Cloud. Wait for the crossover of the Conversion with the Standard lines or the crossover of the Standard line with the prices. The first situation is less frequently observed although the signals received are very strong then.
Naturally, you do not have to use the Ichimoku Cloud on its own. You can add another indicator to the chart as for instance the momentum oscillator to catch when the price falls into oversold or overbought zones.
You can try it all in the IQ Option practice account. It is completely free of charge and you do not risk your own money there. This is just a perfect place to learn how to use the Ichimoku Cloud indicator effectively.
Tell us in the comments section if the Ichimoku Cloud is new to you. Share your experience if you already know it.
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