Learning Series: Ichimoku Cloud
What is an Ichimoku Cloud?
The Ichimoku Cloud is a type of chart that displays support and resistance, momentum, and trend simultaneously. This indicator is a bit more advanced than the previous topics covered in this series. However, it is more simple and easy to use than it would seem at first sight. The Ichimoku Cloud is also known as Ichimoku Kinko Hyo, which roughly translates to “one look equilibrium chart”. This reflects the fact that the Ichimoku Cloud charts can show traders the current trend in one look. Traders then look for potential signals within the trend. The Ichimoku Cloud consists of five lines. Four of these lines are based on the average of high and low over a given period of time. The five lines in an Ichimoku Cloud chart include:
1)Tenkan-sen (Conversion Line)
2)Kijun-sen (Base Line)
3)Senkou Span A (Leading Span A)
4)Senkou Span B (Leading Span B)
5)Chikou Span (Lagging Span)
Figure 1 — Ichimoku Cloud Breakdown — Source: Fidelity.com
Japanese journalist Goichi Hosoda developed The Ichimoku Cloud in the late 1930s. He used to be known as Ichimoku Sanjin. Hosada spent 30 years perfecting his technique of charting before releasing his idea to the public in the late 60s.
Analyzing The Ichimoku Cloud
The Conversion Line and the Base Line are similar to moving averages and are analyzed in relationship to one another. When the Conversion Line (Tenkan-sen) rises above the Base Line (Kijun-sen), the trend is typically bullish. When the Base Line rises above the Conversion Line, the trend is typically bearish. The Conversion line and the Base Line are then analyzed as a group in relationship to the cloud, which is the area between Leading Span A (Senkou Span A) and Leading Span B (Senkou Span B).
When analyzing the cloud itself, prices above the cloud indicates a bullish trend. When Leading Span A is rising and above Leading Span B, the uptrend is strengthening. When Leading Span A is falling and below Leading Span B, the downtrend is strengthening.
Figure 2 — Ichimoku Cloud — Source: corporatefinanceinstitute.com
Thanks for reading this installment of the Dolomite Learning Series. Happy Trading!
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Disclaimer: The information here is intended to be used for educational purposes only and is not financial advice. I am not a financial adviser.
