In 1969, Goichi Hosoda developed and published the Ichimoku Cloud indicator. This indicator enables the user to determine “at a glance” to find the support and resistance level and determine whether the tradable trend exists or not. Ichimoku Cloud indicator is basically two dynamic trend lines which help to identify trading patterns based on past price action. It is gaining popularity among new traders as it combines three indicators and enables them to make informed decisions.
Structure of Ichimoku Cloud Indicator
In order to learn how to read Ichimoku Cloud indicator, you should first get to know its detailed structure. Structural composition of Ichimoku Cloud includes five lines. All these five lines are represented by Japanese words. In the diagram below, these lines are represented by their Japanese names. Their English substitutes are also provided in the chart below:
Calculation of Ichimoku Cloud
Four out of Five lines within the Ichimoku Cloud are averages of Low and high in a given period. For Instance, Tenkan Sen is the average of 9 Day High-Low. Before the availability of High-tech Computing machines, it was relatively easier to determine an average of high and low as compared to moving average. Ichimoku Cloud Consist of:
Senkou Span A (Leading Span A)
It is the average of Tenkan Sen and Kijun Sen and is plotted 26 Days in future. As it is plotted in future so it is also called Leading Span and forms fast cloud boundary. Its mathematical formula is (Conversion Line+Base Line)/2
Senkou Span B (Leading Span B)
It is the mid-point of 52 Periods High and Low range. By default, it is set to 52 but it can be changed manually. It forms the lagging cloud boundary. It is also plotted 26 days in future. Mathematical Formula for its calculation is [(High+Low) of 52 days]/2 + 26 days.
Tenkan Sen (Conversion Line)
It is the mid-point of 9 days high-low range. By default, it is set to 9 but it can be changed manually to any other value. Its Mathematical Formula is 9 periods(High+Low)/2.
Kijun Sen (Base Line)
The default period of Kijun Sen is 26 days. It is the mid-point of 26 periods(days) high-low range. Mathematical formula for its calculation is (26-period high+26 period low)/2
Chioku Span (Lagging Span)
Opposite to Leading spans, it is plotted 26 periods in past so it is called Lagging Span.
How to Read Ichimoku Cloud Signals
Now that you know the structure of the indicator, let’s proceed with how to read Ichimoku Cloud.
Trend can be identified by Ichimoku Signals as:
- The positive trend is identified by price above the Ichimoku Cloud.
- Price below the Ichimoku Cloud signals a negative trend.
- When the price is in between the cloud, it is an undetermined territory.
Ichimoku Cloud Trading Strategy
After extensive testing and research on Ichimoku Cloud Indicator, majority experts have agreed on the following trading strategy.
When Trend is Positive
- Take long position when Tenkan Sen (Conversion line) crosses above Kijun Sen (Base Line).
- Take long position when Price crosses above Kijun Sen (Base Line).
- Close the position when price closes below Kijun Sen (Base Line).
- Close the position when Tenkan Sen (Conversion Line) crossed below Kijun Sen (Base Line).
When Trend Is Negative
- Open a short position when Tenkan Sen (Conversion Line) crosses below Kijun Sen (Base Line).
- Open a short position when Price crosses below the Kijun Sen (Base Line).
- Close the position when price closes above Kijun Sen (Base Line).
- Close the position when Tenkan Sen (Conversion Line) crosses above Kijun Sen (Base Line).
Now that you know how to read Ichimoku Cloud, you can proceed to adding this indicator to your Forex toolbox. Also, it is never necessary to use all the features of the indicator. Choose an Ichimoku indicator strategy and remove the rest of the lines, which you don’t need. This way you will get a better picture of your Ichimoku chart.
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