Ichimoku Cloud Indicator Trading Strategies

The Ichimoku Cloud is also known as Ichimoku Kinko Hyo. It is a versatile indicator that defines support and resistance. It also identifies trend direction, gauges momentum, and provides trading signals, which is translated into a “one look equilibrium chart” and chartists can identify the trend and look for potential signals within that trend. Goichi Hosoda, who was a journalist, developed this indicator and he published the concept in his book in 1969. Some people find the Ichimoku Cloud theory complex when they view the price chart, it is really a straightforward indicator that is very usable.

Components of the Ichimoku Cloud

The best thing about Ichimoku Cloud is it is 100% FREE on any broker’s platform. And the best part of it is, it shows us the past, present and future in the same chart. Let us describe the individual components of the system.

Kumo

Kumo is actually the cloud if we translate the term into Japanese. The cloud tells us how thick or strong the trend is. The thinner the cloud the more signals will be. If a cloud is thin it will carry bigger stop losses. If the cloud is thick it will give fewer signals with smaller stop losses.

Tenkan-sen and Kijun-sen

Tenkan-sen is the blue line on the chart. That is a short-term trend. It is just similar to a 10-period moving average. Its formula is (highest high + lowest low)/2 over the past 9 periods. So that is exactly 50% retracement from the highest high or lowest low. In the Japanese trading calendar, there were 6 days a week and there were 26 days a month. So Tenkan-sen is calculated for 9 periods. It means it has exactly one and a half weeks of data.

Similarly, Kijun-sen is the long-term trend and it is the (highest high + lowest low)/2 over the past 26 periods. That means Kijun-sen has exactly one month of data. It is similar to a 30-period moving average. So the short-term trend is represented by a week and a half of data and the long-term trend is represented by one month of data.

Senkou Span A and Senkou Span B

The Senkou Span A is the future short-term trend. Its formula is (Tenkan-sen + Kijun-sen)/2 plotted 26 periods in the future. The Senkou Span B is the (highest high + lowest low)/2. This is calculated past 52 periods and plotted 26 periods in the future. The Senkou Span A and Senkou Span B tell us the price condition of the future. If it is bullish most likely the stock’s price will be moving up in the future.

Chikou Span

Just like the MACD which makes use of a 26-period MA, the Chikou Spanis the price action of today plotted 26 periods in the past. So it is just the current price action that is plotted for 26 periods in the future.

So Ichimoku Cloud can tell us the current price action, the past price action using the Chikou Span, and the future price action using the Senkou Span A and Senkou Span B.

Common FAQ about Ichimoku Cloud

How to Add the Ichimoku Kinko Hyo to Your Charts?

This indicator is present under the STUDIES section in Zerodha Kite. Watch the image below for the default parameters of the indicator.

Ichimoku Trading Strategies

In Ichimoku Clouds Conversion Line which color green, is the fastest and most sensitive line, and the Base Line which color red, trails the faster Conversion Line. The relationship between the Conversion Line and Base Line is similar to the relationship between a 9-day moving average and a 26-day moving average. In this indicator the 9-day MA is faster and more closely follows the price plot, the 26-day is slower and lags behind the 9-day.

The Cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots. In this indicator, the Leading Span A (green) and Lagging Span B (red) form the Cloud. The Leading Span A is the average of the Conversion Line and the Base Line. Because we calculate the Conversion Line and Base Line with 9 and 26 periods. In this indicator, the green Cloud boundary moves faster than the red Cloud boundary, which is the average of the 52-day (high and low) with moving averages. In this shorter moving averages are more sensitive and faster than longer moving averages.

Ichimoku Cloud Tutorial – Bullish Signals :

• Price moves above Cloud (trend)
• Cloud turns from red to green (ebb-flow within trend)
• Price Moves above the Base Line (momentum)
• Conversion Line moves above Base Line (momentum)

Ichimoku Cloud Tutorial – Bearish Signals :

• Price moves below Cloud (trend)
• Cloud turns from green to red (ebb-flow within trend)
• Price Moves below Base Line (momentum)
• Conversion Line moves below Base Line (momentum)

So we can derive four bullish and four bearish signals from the Ichimoku Cloud plottings. In this indicator, the trend-following signals focus on the Cloud, while the momentum-based signals focus on the Turning and Base Lines. The movements above or below the cloud define the overall trend. In that trend, the Cloud changes color as the trend ebbs and flows. At last finally, simple price movements above or below the Base Line generate signals.

Aggressive Trading Strategy

When the price is above the Ichimoku Cloud, buy the close above the Senkou Span A (9-period moving average). Keep the stop loss on a closing basis below the Senkou Span B (26-period moving average).

Similarly for a short sell, if the price is below the cloud short sell the close is below the Senkou Span A. Keep the stop loss above the Senkou Span B on a closing basis.

Moderate Trading Strategy

Now, this is a moderate strategy for safe traders. Here the entries will be late but they will have fewer whipsaw. When the price is above the Ichimoku Cloud, buy the close above the Senkou Span B (26-period moving average). Keep the stop loss in the middle of the Kumo Cloud.

Similarly for a short sell, if the price is below the cloud short sell the close is below the Senkou Span B. Keep the stop loss above the middle of the Kumo Cloud.

Counter Trend Trade

Just like the Alligator indicator first wise man signal, we can also use Ichimoku Cloud for counter trend entries. If the price is away from the cloud if we get a reversal candlestick pattern like pin or hammer etc, we can enter a long or short above or below the bar. Watch the image below to understand the strategy. Keep the first target at the cloud and then trail with the 26-period moving average.

Combining Ichimoku Cloud with Other Strategies

Ichimoku and Elliott Wave

In the Ichimoku strategy, there are a few pros and a few cons.

The pros and cons are:

• Trend identification: Excellent
• Early entry: Excellent
• Support and Resistance identification: Excellent
• Price target: Poor
• Risk management: Poor
• Trade management and position sizing: Poor
• Exit points: Poor

So a vast improvement in the system can be made if we combine the Ichimoku Cloud with the Elliott Waves theory. In general, we all want to trade Wave 3 and Wave 5 of the Elliott Waves. These 2 waves are impulsive waves where we can see dramatic price movements.

Wave 3 and wave 5 can occur in both the bull market as well as the bear market. The same prices and measurements are applicable for both types of markets. In contrarian to the Ichimoku Cloud, the Elliott Waves offers poor early entry, poor Support, and Resistance identification. But it offers excellent price targets and good exit points. Hence if we can mix and match these 2 systems we can create a very powerful trading system. We can enter on the basis of Ichimoku Cloud and fix the exits on the basis of Elliott Waves calculation.

Ichimoku and Fibonacci

Just like as we combined Ichimoku Cloud with Elliott Waves we can mix and match it with the Fibonacci retracement technique too. As in the case of the example below, in the Coal India share price, the sell signal is generated when the price breached the Ichimoku Cloud. This has also breached the 61.8% retracement level of the last rally. So this opens up the downside targets. The first target will be a 100% retracement level and the second target will be a 138.2% retracement level. Check the example of how price marked both the price targets before taking a U-turn.

Hence combining the Ichimoku Cloud with Fibonacci can decide the price targets easily.

Ichimoku and HeikIn Ashi Strategy

We can also mix Ichimoku Cloud with Heiken Ashi or Heikin Ashi candles to create robust trading systems. The Heikin Ashi can keep us in the trade till the trend lasts in the market. A big green Heiken Ashi candle without a lower shadow above the cloud signals a strong buy. While a big red Heiken Ashi candle with no upper shadow below the cloud signals a strong short sell. The HA candle closing on the other side of the 26-period moving average signals an exit from buy or short sell.

Downloads

Ichimoku Cloud PDF (Powerpoint Presentation) by Mr. David Linton

We are sharing a here nice power point presentation written by CFTE, MSTA Mr. David Linton. This PowerPoint presentation will give you a solid introduction to how Ichimoku charts work. You may distribute this PowerPoint presentation to your friends but do not forget to refer them to our site.

Ichimoku for AmiBroker

We are also sharing a here nice Ichimoku formula for AmiBroker with probable strong and weak buy/sell signals. Download the AFL Formula from here. Please see the image below to get an idea how the AmiBroker formula looks like.

Suggested Reading on Ichimoku Cloud

There are many good books on Ichimoku Cloud trading. Out of them, I suggest the following book: Trading with Ichimoku Clouds: The Essential Guide to Ichimoku Kinko Hyo Technical Analysis (Wiley Trading).

Conclusion

Ichimoku Cloud is a trend-following indicator developed by Japanese journalist Goichi Hosoda. It is not just an indicator. Rather it is a complete trading strategy. This indicator shows the current support and resistance. It also shows the present trend in the short-term as well as the long-term. This indicator component also shows the price trend in the past as well as in the future.