What Is the Ichimoku Indicator?

In Japanese The Meaning Ichimoku Kinko Hyo Is “One Glance Equilibrium Chart”, It Was Developed Buy Goichi Hosoda In The Late 1930, A Japanese Journalist Name Ichimoku Sanjin Spent His 30 Year In Perfection The Technique Of Goichi Hosoda And In the Year 1960 He Finally Published His Work, Describing The Detail Of This Indicator And Different Component  That We Will See  Later, In Ichimoku Indicator Is A Unique Indicator Because It Provides The  Information To Trader Such As,

  • The Direction Of Trend (Up, Down, Sideways),
  • Strength Of The Momentum
  • Current Support And Resistance
  • Future Support And Resistance

It Is Called  One Glance Because Of All These Different Information Are Available To Trader In A Single Indicator And Trader Needed Only One Glance To Analysis Any  Tradable Security, And That’s Why It Is Named Ichimoku, “One Glance “Indicator.

Component of Ichimoku Cloud

Component of Ichimoku Cloud
  • Tenkan  Sen Or Conversion Line: It Is Used As A Signal Line  Denoted By Red Colour, It Act As A Minor Support And Resistance, Price Bounce After A Minor Pull Back Form Tenkan  Sen, It Is The Average Of The Highest High + Lowest Low Or Past 9 Period.
  • Kijun Sen Or Base Line: It Is Use As Confirmation Line Support And Resistance, Also Used As A Trailing Sl in Daily Time Frame, It Is Indicated By Blue Line, If Price Is Sustain Above   Kijun Sen It Would Be Considered As A Bullish Sign, As We Can Assume That Price  Will  Climb Higher 
  • Chikou Span: Today’s Closing Price Plotted 26 Day Back, It Is  Indicated buy signal,  The Green Line, It Is Also Called Lagging Span Used As A Support And Resistance, Also Depending On Its Position In The Chart  Strength Of The Momentum Can  Be Known. If The Chikou Span (the Green Line) Crosses The Price In The Bottom-Up Direction, That Is A Buy Signal. If The Green Line Crosses The Price From The Top-Down, That Is A Sell Signal.
  • Kumo Cloud: It Is The Space Between  The Senkou Span A Span B, The Cloud Edge Represent The Current And  Future Support Resistance, Its Thickness Give The Idea Regarding  The State Of Market i.e, Either Trending(Narrow Cloud) Or Sideway(Thick Cloud) Price Above The Cloud Is Considered To Be Bullish, And Price Below Cloud Is Bearish, Price With In The Cloud Is Consider To Be In Consolidation Phase
  • Senkou Span And Senkou Span B:  Span A And Span B Are The Outer Boundry Of The Cloud For Abullish Market The Span A Is Above The Span B, And Vice Versa, The Cloud Is Of Green Colour For The Bullish Market And Of Red Colour For The Bearish Market, Span A And Span B Cross Over Reflect The Key Trend Reversal Or Trend Continuation Point  In The Chart

Calculation For Ichimoku Cloud

The following are the five formulas for different components of the Ichimoku cloud.

Calculation For Ichimoku Cloud

Here,

PH = Period High

PL = Period Low

CL = Conversion Line

What Does The Ichimoku Cloud Tell You?

Ichimoku Cloud Is A Complete System In It Self, That Tell The Direction And Movement Of The Market, Along With The Support And Resistance (Current And Future), It Gives The Signal Like

  1. T-Sen & K-Sen Crossover,
  2. K-Sen & Price Crossover,
  3. Price & Cloud Breakout,
  4. Future Cloud Cross Over,

 Along With Them, We Look At The Position Of The Chikuspan Concerning Price And The Position Of  Price Respect To  With Cloud, And Then Confirm The Signal To Avoid Any False Trade

In General Price Above The Cloud It Is Said To Bullish And Price Below The Cloud Is Said To Be Bearish, And When The Price Is Within The Cloud It Is In Sideways Moment, Better Not To Take Any Trade With In The Cloud As There Is No Clear Trend In The Market, For High Probaliltiiy It Is Alwage Better To Trade In The Direction Of The Bigger Trend So It Is Advisable To Buy Only Above The Cloud And Sell When Is Price Is Below The Cloud.

Learn More About: TECHNICAL ANALYSIS

Example:1 Lets Look At T-Sen & K-Sen Crossover Trading Strategy

Crossover Are Another Way The Indicator Can Be Used. Watch For The T-Sen Line (Blueline) To Move Below The K-Sen(Red) Line, Especially When Price Is Below The Cloud. This Can Be A Powerful Sell Signal.

T-Sen & K-Sen Crossover Trading Strategy

This Chart 5 Points Are Clear To Us Which Give Us The Idea About The Possible Trade Setup

  • Trend- Price Is Below The Cloud, Signalling  A Down Trend.
  • Momentum- We Get The Information About The Momentum From Chiku Span, When The Crossover Of Blue And Red Line Occur, At That Point, The Chikuspan (Green Line) Was At Location Represented By Point 3, Here The Green Line Was Below The Price Which Tells Us That Momentum Is Downward.
  • Confirmation – Point 4 Represent The Cross Of The Cloud, Which  Signal The Start Of New Trend.
  • Confirmation – Point 5  Show That The Price Is Below The Cloud, Indicating A Weakness, Also The Future Cloud Is Red And Below The Price, In That Case, The Cloud Will Act As A Resistance To Price.
  • Entry Point –  At point 2, it Is The Place  Where The Crossover Of The Blue (Tenkan  Sen) And Red (Kijun Sen) Occur Indicating The Change In Trend  From Side Ways To Downward, We Will Entre A Long Trade At That Point
  • Stop-loss  Here Stop loss Could Be Placed Outside The Upper Cloud Border.
  • Exit? One Could Exit At A Point When He Is Getting A Good Risk To Reward Ratio Or When The  Trend Changed Form Down To Up I.E. When Price Cross The K–Sen Form Downside To Upside Which Happens At 14:00, After A Green Candle Close Above The K–Sen  Line.

Example:2  Let’s Look At Price And Breakout Trading Strategy:

Here In This Strategy Then The Price Cross Above The Cloud After A Downtrend, And Closed Above It, We Will Look For A Buy Setup

Price And Breakout Trading Strategy

Underlying Asset Is Banknifty Future

Here How To Read Ichimoku Chart

  • Trend  Up, As The  Price Crossed  The Cloud And Closed Above It, 
  • Momentum? We Get The Information About The Momentum From Chiku Span, When Price Closed Above The Cloud, At That Point, The Chikuspan (Green Line) Was In Open Space, The Green Line Was Below The Price Which Tells Us That Momentum Is Upward.
  • Confirmation Before The Breakout There Was The Cloud Cross Over, Which  Signal The Start Of New Trend.
  • Confirmation Price Is Above The Cloud, Indicating A Strength, Also The Future Cloud Is Green And Above  The Price, In That Case, The Cloud Will Act As A Support To Price.
  • Entry Point? When The High Of The Candle Which Closed Above The Cloud Is Broker We Will Enter A Long Trade At That Point
  • Stoploss- Here Sl Could Be Placed Outside The Lower Cloud Border.
  • Exit – One Could Exit At A Point When He Is Getting A Good Risk To Reward Ratio Or When The  Trend Changed Form Up To Down I.E. When Price Cross The K –Sen Form Upside To Downside After A Red Candle Close Below The K Sen Line.

Trader Should Use The Ichimoku Cloud In Conjunction With Other Technical Indicators  TO AVOID FALSE TRADE,

Ichimoku  Cloud Vs Moving Averages

One Indicator Is Not Better Than Another, They Just Provide Information In Different Ways.

Ichimoku Is Also A Collection Of The Information Form The Past Averages, But As The Ichimoku Is Calculated based on The High And Low, Rather Than A Close Price, It Account And Reflect The Volatility Of The Underlying Asset In Much Better Way, That Help Us In Placing The Stop Loss Or Trailing Sl.

Limitations Of Using The Ichimoku Cloud

Since There Are Lot Of Element In The Cloud Which Reflects Different Information At The Same Time This Can Make Chart Messy, And Difficult To Understand If The Concept Of The Ichimoku Is Not Clear To The Trader.

Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.