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Ichimoku Cloud Trading Strategies

Ichimoku Cloud is a technical analysis tool that has gained widespread popularity in recent years among traders and investors. It is a comprehensive system that provides a holistic view of the price action.

In this article, we will explore the basics of the Ichimoku Cloud indicator, its components, and how to interpret it. We will also discuss some popular Ichimoku Cloud strategies and how they can be applied in different market conditions. Whether you are a novice trader or a seasoned investor, this article will provide you with a solid foundation to start using Ichimoku Cloud to enhance your trading strategies.

What Is the Ichimoku Cloud Indicator?

The Ichimoku Cloud indicator, also known as the Ichimoku Kinko Hyo, is a technical analysis tool that was developed by Japanese journalist Goichi Hosoda in the late 1930s. The word “Ichimoku” can be translated as “one look” or “one glance,” and the indicator is designed to provide a comprehensive view of the price action in a single glance.

The Ichimoku Cloud indicator consists of five lines and a shaded area, known as the Kumo Cloud or simply the Ichimoku Cloud. These lines and the cloud are plotted on a price chart and are used to identify potential trends, support and resistance levels, and entry and exit points.

The five lines of the Ichimoku Cloud indicator are:

  1. Tenkan-sen: The Tenkan-sen is calculated by averaging the highest high and the lowest low over the past nine periods. It represents the short-term trend and can be used as a signal line for buying or selling.
  2. Kijun-sen: The Kijun-sen is calculated by averaging the highest high and the lowest low over the past 26 periods. It represents the medium-term trend and can be used as a support or resistance level.
  3. Chikou Span: The Chikou Span is the current closing price plotted 26 periods behind. It is used to confirm the trend and to identify potential support or resistance levels.
  4. Senkou Span A: The Senkou Span A is calculated by averaging the Tenkan-sen and the Kijun-sen and then plotting the result 26 periods ahead. It forms the lower boundary of the Ichimoku Cloud and can be used as a support level.
  5. Senkou Span B: The Senkou Span B is calculated by averaging the highest high and the lowest low over the past 52 periods and then plotting the result 26 periods ahead. It forms the upper boundary of the Ichimoku Cloud and can be used as a resistance level.

To plot the Ichimoku Cloud, or Kumo Cloud, on a chart, the area between Senkou Span A and B are shaded, with the space between them indicating the potential range of support and resistance levels. The cloud’s color can also be used to identify the trend, with a green cloud indicating an uptrend and a red cloud indicating a downtrend. The Tenkan-sen and Kijun-sen lines are also plotted on the chart, with traders using their intersections and positions relative to the cloud to identify potential trading signals.

Ichimoku Cloud Trading Strategies

The Ichimoku Cloud indicator can be used in different market conditions, but it tends to work best in trending markets where price action is directional and relatively consistent. The following are the most common Ichimoku Cloud trading strategies to use in trending markets:

Tenkan/Kijun Cross

The Tenkan-sen and Kijun-sen lines are the two primary lines in the Ichimoku Cloud. A bullish signal occurs when the Tenkan-sen line crosses above the Kijun-sen line, while a bearish signal occurs when the Tenkan-sen line crosses below the Kijun-sen line. Traders often use this strategy to enter and exit trades based on these crossovers.

Kumo Breakout

The Kumo, or cloud, is the area between the Senkou Span A and Senkou Span B lines. A bullish signal occurs when the price breaks above the upper Kumo, while a bearish signal occurs when the price breaks below the lower Kumo. Traders often use this strategy to identify strong support and resistance levels and potential trend reversals.

Chikou Span Confirmation

The Chikou Span is the lagging line in the Ichimoku Cloud, which is plotted 26 periods behind the current price. A bullish signal occurs when the Chikou Span crosses above the price, while a bearish signal occurs when the Chikou Span crosses below the price. Traders often use this strategy to confirm other signals and to identify potential trend reversals.

Kumo Twist

A Kumo Twist occurs when the Senkou Span A and Senkou Span B lines switch positions, with Senkou Span A moving above Senkou Span B in a bullish twist or below in a bearish twist. Traders often use this strategy to confirm a trend reversal and to identify potential entry and exit points.

Kijun Bounce

The Kijun-sen line is a critical indicator in the Ichimoku Cloud, representing the medium-term trend. A bullish signal occurs when the price bounces off the Kijun-sen line and starts moving higher, while a bearish signal occurs when the price bounces off the Kijun-sen line and starts moving lower. Traders often use this strategy to identify potential support and resistance levels and to confirm other signals.

Ichimoku Cloud Pros and Cons

Here are some pros and cons of using Ichimoku Cloud strategies:

Pros:

  1. Comprehensive view: The Ichimoku Cloud indicator provides a comprehensive view of the price action in a single glance, which can help traders make informed trading decisions.
  2. Versatility: The Ichimoku Cloud indicator can be used in a variety of financial markets and time frames, making it a versatile tool for traders and investors.
  3. Potential for identifying trends: The Ichimoku Cloud indicator is designed to identify potential trends, which can help traders enter and exit trades at the right time.
  4. Multiple strategies: There are several strategies that traders can use with the Ichimoku Cloud indicator, providing them with different options for their trading style and preferences.

Cons:

  1. Complexity: The Ichimoku Cloud indicator can be complex for beginners to understand, as it consists of several components and lines.
  2. Lagging indicator: The Ichimoku Cloud indicator is a lagging indicator, which means that it may not provide timely signals for fast-moving markets.
  3. False signals: Like any other technical analysis tool, the Ichimoku Cloud indicator can provide false signals, which can lead to losses for traders.
  4. Subjectivity: The interpretation of the Ichimoku Cloud indicator can be subjective, and different traders may have different opinions on the best way to use it.

In summary, while the Ichimoku Cloud indicator has several benefits, it also has some drawbacks. Traders and investors should carefully consider these pros and cons and use proper risk management techniques before trading with the Ichimoku Cloud indicator.

Example scanners and strategies that use Ichimoku Cloud

Ichimoku Cloud can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"Ichimoku Pullback Long" scanner by TrendSpider
charts.trendspider.com
“Ichimoku Pullback Long” scanner by TrendSpider
"Ichimoku Strategy #blog #30m" strategy by TrendSpider
charts.trendspider.com
“Ichimoku Strategy #blog #30m” strategy by TrendSpider

The Bottom Line

In conclusion, the Ichimoku Cloud indicator is a powerful technical analysis tool that provides a comprehensive view of the price action in a single glance. It consists of five lines and a shaded area, known as the Kumo Cloud, which can be used to identify potential trends, support and resistance levels, and entry and exit points.

Overall, the Ichimoku Cloud indicator is a popular tool among traders and investors, especially in Japan, and can be used in a variety of financial markets. By understanding how to use the Ichimoku Cloud indicator and its various components, traders can potentially improve their trading performance and achieve their financial goals.

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