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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.
Key Takeaways🔑
| →The Ichimoku Cloud is a versatile indicator that helps identify trend direction, support and resistance levels, and trade signals. |
| →The indicator is based on high-low averages, making it relatively easy to calculate and understand. |
| →Optimal time frames and complementary indicators may vary depending on individual trading styles and preferences. |
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 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 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.
How do I trade with Ichimoku cloud?
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 continue 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.
Which indicator works best with Ichimoku?
Ichimoku is not only an indicator, but it is basically a ready-made methodology for reading a price chart. With this tool, you are able to determine the trend and get ready-made trading signals. The chart itself with the indicator superimposed may look quite unclear at first. However, after getting to know Ichimoku, the indicator lines become familiar and the chart looks better. If you decide to use this indicator, I have one piece of advice. Ichimoku does not need additional indicators, so do not add more to the chart, because then the problems with the readability of the chart will only begin. Ichimoku gives you everything you need for successful trading.
Which time frame is best for Ichimoku?
The index itself was developed in the late 1930s. In those days there were no computers and the diagrams themselves were sketched by hand on millimetre paper. At that time it did not yet work on intraday charts, which indicates that Goichi Hosoda worked on daily, weekly and monthly time frames. In technical analysis, however, different methods often work on multiple intervals. This is also the case with Ichimoku. It turns out that many people use Ichimoku in day trading. Thus, the fractal nature of the price chart allows the indicator to be used on virtually any time frame.
I know scalpers who use Ichimoku on 1-minute and even lower charts. Of course, the market for this type of trading must be volatile and have good liquidity.
Pros and Cons of the Ichimoku Cloud Indicator👍👎
Pros:
- 📊 Provides a comprehensive overview of market trends and key levels
- 🔄 Offers multiple signals for trading opportunities
- ⚖️ Balances sensitivity and reliability with its various components
- 💡 Visual representation of data helps traders quickly assess market conditions
Cons:
- 🔀 Can be initially confusing due to its multiple components
- 🚧 May not be suitable for all trading strategies or time frames
- ⚠️ False signals are possible, as with any indicator
- 📈 Requires practice to interpret and apply effectively
| Ichimoku Cloud Components | Function |
|---|---|
| Tenkan (Conversion Line) | Midpoint of the 9-day high-low range; most sensitive component |
| Kijun (Standard Line) | Midpoint of the 26-day high-low range; used for trend confirmation |
| Senkou Span A (1st Cloud Line) | Midpoint of Tenkan and Kijun; forms the faster boundary of the cloud |
| Senkou Span B (2nd Cloud Line) | Midpoint of the 52-day high-low range; forms the slower boundary of the cloud |
| Chikou Span (Lagging Span) | Closing price plotted 26 periods behind; used for additional trend confirmation |
Is Ichimoku Cloud strategy good?
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 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.
Enjoy trading!
Q&A on Ichimoku Cloud Indicator💡
- Q: What is the main purpose of the Ichimoku Cloud Indicator?
- A: The Ichimoku Cloud Indicator is designed to provide a comprehensive overview of market trends, support and resistance levels, and potential trading signals.
- Q: How do I trade with the Ichimoku Cloud?
- A: When trading with the Ichimoku Cloud, look for signals such as price crossovers with the Standard Line or Conversion Line, as well as trend direction and support/resistance levels indicated by the cloud itself.
- Q: Can I use the Ichimoku Cloud with other indicators?
- A: Yes, the Ichimoku Cloud can be used alongside other indicators to provide additional confirmation or insight into market conditions. Some traders combine it with moving averages, RSI, or other technical analysis tools.
- Q: Is the Ichimoku Cloud suitable for all time frames?
- A: The Ichimoku Cloud can be applied to various time frames, but its effectiveness may vary depending on the specific time frame and trading strategy being used.
- Q: How can I improve my trading with the Ichimoku Cloud?
- A: Practice and experience are essential for mastering the Ichimoku Cloud. Spend time familiarizing yourself with its components, signals, and how they interact with market conditions. Also, consider testing different time frames and strategies to find the approach that works best for your individual trading style.