The Ichimoku Clouds 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. This technical indicator was actually developed by Goichi Hosoda, who was a journalist and published the concept in his book published in 1969. The Ichimoku Clouds tutorial is complicated to understand when viewed on the price chart, it is really a straightforward indicator that is very usable.
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. In this indicator 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. These 9 and 26 are the same periods used.
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 the Conversion Line and Base Line are calculated 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. This indicator is present under the STUDIES section in Zerodha Kite charts. Watch the image below for the default parameters of the indicator.
The uses of the Conversion Line and as well as the Base Line are identified faster and also much more frequent signals of the price. This is important to remember that 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.
Ichimoku Clouds 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 Clouds 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)
This indicator’s features are four bullish and four bearish signals derived from the Ichimoku Clouds plottings. In this indicator, the trend-following signals focus on the Cloud, while the momentum signals focus on the Turning and Base Lines. In 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 can be used to generate signals.