Trading The Ichimoku Cloud
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You don’t need many indicators to follow the trend. Ichimoku is very powerful tool to understand trend.
In this reading, you are going to understand the calculation behind the Ichimoku, how to trade it and what adjustments you should make for cryptocurrency market.
Introduction
- The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, was developed by journalist Goichi Hosoda.
- Ichimoku Kinko Hyo means “one look equilibrium chart”
- Ichimoku shows support and resistance, identifies trend direction, gauges momentum and provides trading signals.
- Ichimoku consists of five elements: Tenkan Sen, Kijun Sen, Senkou Span A, Senkou Span B and Chikou Span
Tenkan Sen (Conversion Line)
- The Tenkan Sen is simply an average of the 9-day high and 9-day low.
- The Tenkan-Sen is the fastest moving line in the Ichimoku Cloud indicator.
- The Tenkan Sen is not same with simple moving average. The Tenkan Sen and MA calculations are different.
- Tenkan-Sen is its own line, but its value is also used in the Senkou Span A (Leading Span A) formula.
Kijun Sen (Base Line)
- The Kijun Sen is simply an average of the 26-day high and 26-day low.
- The Kijun-Sen is the second fastest moving line in the Ichimoku Cloud indicator.
- On a daily chart, this line is the midpoint of the 26-day high-low range.
- When the price is above Kijun-sen, medium-term price momentum is up. If the price is below Kijun-sen then price momentum is down.
Senkou Span A (Leading Span A)
- The Senkou Span A is simply midpoint between the Conversion Line and the Base Line.
- The Senkou Span A forms one of the boundaries of Kumo Cloud.
- It is referred to as “Leading” because it is plotted 26 periods in the future.
- The Senkou Span A line is considered to be the faster cloud boundary.
Senkou Span B (Leading Span B)
- The Senkou Span B is simply an average of the 52-day high and 52-day low.
- The Senkou Span B forms one of the boundaries of Kumo Cloud.
- Leading Span A and Span B crossovers may signal a trend change.
- The Senkou Span B line is considered to be the slower cloud boundary.
Chikou Span (Lagging Span)
- The Chikou Span’s default setting is 26 days.
- Close plotted 26 days in the past.
- It is referred to as “Lagging” because it is plotted 26 periods in the past.
- The Chikou Span are designed to allow traders to visualize the relationship between current and prior trends.
Timeframes
We all know that high timeframes are more reliable than the lower timeframes. For Ichimoku, I advise you to use 4 hour, 1 day and 1 week charts because of the trend.
It does not mean that it is useless in lower timeframes. You can use it in lower time frames like 30 minutes, 1 hour and 2 hour. Also, some of the coins do not have enough price history to show Ichimoku Cloud properly. For them, you can use lower timeframes.
How to find Support/Resistance using Ichimoku Cloud?
Ichimoku elements can work as dynamic support and resistance levels. To use it as dynamic support and resistance level, you need to look at:
- The Tenkan Sen
- The Kijun Sen
- Kumo Cloud [If Kumo cloud is flat better support/resistance]
1. The Tenkan Sen as Dynamic Support/Resistance
In bullish trends, you can see that Tenkan Sen can be used as dynamic support level. Also in bearish trends, break below Tenkan Sen make it as dynamic resistance level.
2. The Kijun Sen as Dynamic Support/Resistance
Especially in bullish trends, using Kijun Sen as dynamic support is profitable trading strategy. In the chart you can see the bounces from Kijun Sen. Also, you can use it as dynamic resistance level.
3. The Kumo Cloud as Dynamic Support/Resistance
The Kumo Cloud gives you insight about the future of trend. You can use Kumo Cloud as dynamic support and resistance level as shown above.
Trading The Ichimoku Cloud
We learned that Ichimoku Cloud can work as dynamic support and resistance levels. Because of this, Ichimoku Cloud identifies trend, direction and trading signals. You can use the Ichimoku Cloud trading strategies below:
- Tenkan Sen, Kijun Sen Cross (TK Cross)
- Kumo Cloud Breakout
- Kumo Cloud Edge to Edge
- Kijun Sen Bounce
- Kijun Cross
- Kumo Cloud Change
1. Tenkan Sen, Kijun Sen Cross (TK Cross)
When Tenkan Sen crosses Kijun Sen above, its a bullish signal. When Tenkan Sen crosses Kijun Sen below, its a bearish signal.
2. Kumo Cloud Breakout
When price breaks up the Kumo Cloud to the upside, its a bullish signal. When price breaks up the Kumo Cloud to the downside, its a bearish signal.
3. Kumo Cloud Edge to Edge
When price breaks in the red Kumo Cloud target is other edge of the cloud and its a bullish signal. When price breaks in the green Kumo Cloud target is other edge of the cloud and its a bearish signal.
4. Kijun Sen Bounce
If the price is above Kijun Sen, medium-term price momentum is up. If the price is below Kijun Sen, price momentum is down. You can use Kijun Sen as dynamic support/resistance level.
Note: Kijun Sen Bounce Strategy should be traded in higher timeframes.
5. Kijun Sen Cross
When price breaks up the Kijun Sen to the upside, its a bullish signal. When price breaks down the Kijun Sen to the downside, its a bearish signal.
6. Kumo Cloud Change
When Senkou Span A and B crosses to the upside, Kumo Cloud will be green. Its a bullish signal. When Senkou Span A and B crosses to the downside, Kumo Cloud will be red. Its a bearish signal.
Adjusting Ichimoku Cloud Settings for Cryptocurrency Market
The Ichimoku Cloud settings generally made for traditional markets but cryptocurrency market is open for 7/24. Because of this reason, I use the settings below.
Personal Opinion
I really like to use Ichimoku Cloud in higher timeframes. It gives me insight to predict how trend can be seen in the future. For example, If you know trend reading very well with Ichimoku Cloud, you could easily predict the upside movement from $3800 to $10000.
Also, do not forget to support your bias with technical analysis. Try to learn how to read the trend. Because if you learn, you will earn... I hope this reading will help you to understand trends and change points. Thank you…
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Resources
For more information about Ichimoku Cloud, you can read “Trading with Ichimoku Clouds” by Manesh Patel
