Ichimoku Cloud Indicator Trading Strategies

Ichimoku Kinko Hyo

The Ichimoku Cloud is also known as Ichimoku Kinko Hyo. It is a versatile indicator which defines support and resistance. It also identifies trend direction, gauges momentum and provides trading signals, which is translated into “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 of 1969. Some people find the Ichimoku Cloud theory complex to when they view on the price chart, it is really a straightforward indicator that is very usable.

Components of the Ichimoku Cloud

The best thing of Ichimoku Cloud is it is 100% FREE on any broker’s platform. And the best part of it it shows us the past, present and future in the same chart. Let us describe 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 more 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 less signals with smaller stop losses.

Senkou Span A and Senkou Span B

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

Tenkan-sen and Kijun-sen

Tenkan-sen is the blue line on the chart. Thay 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 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 months of data. It is similar to a 30-period moving average. So the short term trend is represented by an week and half of data and the long term trend is represented by one month of data.

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 past. So it is just current price action that is plotted 26-periods in future.

Ichimoku Cloud

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

What is Ichimoku Cloud?

The Ichimoku Kinko Hyo, in any other word, referred to as the Ichimoku Cloud, is a specialized technical analysis tool supposed to offer support and resistance. It also generates buy and sell buy and sell signals as per its own logic. Goichi Hosoda, a Jap author, created this indicator. Ichimoku Kinko Hyo is interpreted in English as ‘one look equilibrium chart’.

How Ichimoku Cloud works?

The bullish signals are created when prices are above the cloud and the cloud is green. In this indicator, the bearish signals are created when prices are below the cloud and the cloud is red. Bullish signals are preferred when the bigger trend is up (prices above green cloud), while bearish signals are preferred when the bigger trend is down (prices are below red cloud). This is the essence of trading in the direction of the bigger trend. Signals that are counter to the existing trend are deemed weaker.

What is Ichimoku Kinko Hyo?

Ichimoku Kinko Hyo is another name for the Ichimoku Cloud. Kinko Hyo is a Japanese word. Actually this indicator was developed by a Japanese named Goichi Hosoda. He named it in Japanese that is later being translated into English.

Is Ichimoku profitable?

Ichimoku Cloud is a complete trading system that can judge the price action in the present as well as in the past and future. It has defined set of rules of entry and exit. This indicator is highly profitable when we use it with recommended guidelines. We can also increase the effectiveness of the indicator by mixing and matching with some other indicators and trading strategies.

Is Ichimoku the best indicator?

We can not tell whether Ichimoku Cloud is the best indicator or not. But as per our observations it is a complete trading system. It has defined set of rules of entry and exit. If it is not the best indicator then it is very close to be one of the best indicators available on our charts.

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

Ichimoku Cloud In Zerodha Kite

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 26-day moving average. In this indicator the 9-day MA is faster and more closely follows the price plot, 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 four bullish and four bearish signals derived from the Ichimoku Cloud plottings. In this indicator, the trend-following signals focus on the Cloud, while the momentum 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 generates signals.

Aggressive Trading Strategy

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

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

Aggressive Trading Strategy

Moderate Trading Strategy

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

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

Moderate Trading Strategy

Counter Trend Trade

Just like the Alligator indicator first wise man signal, Ichimoku Cloud can also be used for counter trend entries. If 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.

Counter Trend Strategy

Combining Ichimoku Cloud with Other Strategies

Ichimoku and Elliott Wave

In the Ichimoku strategy there is few pros and 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 the wave 3 and wave 5 of the Elliott Waves. These 2 waves are impulsive waves where we can see dramatic price movements.

Basic Elliott Waves

Wave 3 and wave 5 can occur in both the bull market as well as the bear market. The same priciples and measurements are applicable for both type 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 between 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 Elliott Wave

Ichimoku and Fibonacci

Just like as we combined Ichimoku Cloud with Elliott Waves we can mix and match it with Fibonacci retracement technique too. As in case of the example below, in 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. First target will be 100% retracement level and second target will be 138.2% retracement level. Check the example how price marked both the targets before taking an u-turn.

Ichimoku and Fibonacci

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

Ichimoku and Heiken 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 no lower shadow above the cloud signals a strong buy. While qa 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.

Ichimoku with Heiken Ashi

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 on how Ichimoku charts work. You may distribute this powerpoint presentation to your friends, but do not forget them to refer them to our site.

Ichimoku for AmiBroker

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

Ichimoku AmiBroker AFL

Please use any of the social share buttons to unlock the download section.

CLICK HERE to download the powerpoint.

CLICK HERE to download the AmiBroker AFL.

Suggested Reading on Ichimoku Cloud

There are many good books on Ichimoku Cloud trading. Our of them I suggest the following. 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 short-term as well as long term. This indicator components also shows the price trend in past as well as in future.

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Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.

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