How does it work?
To give an illustration of what Ichimoku Cloud is, let’s break it down into separate elements. There are five elements in total and each one is a different kind of a moving average.
The conversion line Tenkan (blue) and the standard line Kijun (red) are also called equilibrium lines. The conversion line (blue) averages the highest high and the lowest low for the last 9 periods. It can signal the trend reversal when crossing the standard line (red). In comparison, the standard line averages the highest and lowest values for the last 26 periods. It serves as a dynamic support and resistance level.
The second pair of moving averages Senkou Span A and Senkou Span B form the so-called cloud. Senkou Span A-averages the two equilibrium lines and shifts the derived values 26 periods ahead. Senkou Span B averages the highest high and the lowest low for the last 52 periods, shifting the results 26 periods forward.
In between Senkou Span A and B forms a shaded area on the chart. It is a cloud, which changes color from red to green and vice-versa every time these two boundaries cross each other. When the cloud turns green, overall sentiment on the market is considered to be bullish. Conversely, when the color becomes red, market sentiment is considered to be bearish. The cloud changes its color when the trend reversal is possible. The vertical distance between the borders of the cloud can serve as an indicator of market volatility.
Finally, the Chikou Span (green-colored line) represents the closing price of the current candle, which is shifted back by 26 periods. This lagging moving average serves as an aid to confirm other signals, received by this indicator.
How to set up?
Here is how to set up Ichimoku Cloud:
- Go to the ‘Indicators’ menu by clicking the corresponding button in the bottom-left corner of the screen.
- Go to the ‘Trend’ tab
- Choose Ichimoku Cloud from the list of available indicators and click apply without changing the settings.
That’s it! You will be able to change the settings for Ichimoku Cloud or remove the indicator from the chart by going back to the ‘Indicators’ icon. Don’t change the settings until you understand completely what you are doing, as it can be quite tricky for a newcomer.
Trading signals
All things considered, Ichimoku Cloud suggests a bullish trend when candles are above the cloud. When the cloud turns from red to green, the candles move above the Kijun baseline, and the Tenkan conversion line moves above the baseline, an indicator is signaling that the market may be reversing to bullish. On the contrary, Ichimoku Cloud suggests a bearish trend when the candles are below the cloud. When the cloud turns from green to red, the candles move below the Kijun baseline, and the Tenkan conversion line moves below the baseline, an indicator is signaling that the market may be reversing to bearish. Professional traders prefer to combine Ichimoku Cloud with other indicators for a more accurate analysis. However, it can also be used on its own.