Ichimoku Cloud

Definition

The Ichimoku Cloud is a package of multiple technical indicators that signal support, resistance, market trend, and market momentum. It is one of the few indicators out there that attempts to convey a number of meaningful insights into one. For that reason it can be hard to understand at first glance, but is commonly used among professional traders and market participants.

History

In the late 1960s, Goichi Hosada introduced the Ichimoku Cloud. It took several years for its adoption and understanding to take off, but today it is commonly known and used as an indicator in the field of technical analysis.

Calculations

The Ichimoku Cloud can be calculated in several different ways. It depends on your timeframe, needs, and expertise in technical analysis. 

where:

PH = Period high

PL = Period low

CL = Conversion line

The highs and lows that are mentioned within the calculation point towards the highest and lowest prices that are analyzed during the chosen period. By adding the Ichimoku Cloud indicator, the calculations for highest and lowest prices will be done for you. Regardless, you can do it yourself if you choose. The steps to do your own calculations are listed below.

1. Start by calculating the conversion line and the baseline.
2. Next, use your previous calculations to then calculate the Leading Span A. Once you have this new calculation, plot this data point 26 periods in the future.
3. Once you’ve done so, go ahead and calculate Leading Span B, and again, plot this data point 26 periods in the future as well.
4. In terms of the lagging span, go ahead and plot the closing price 26 periods in the past on your chart. The differences between Span A and Span B will be visible in a different color, thus initiating the “cloud” effect. Note that the cloud is green when Leading Span A is above Leading Span B and is red when Leading Span B is above Leading Span A.
5. In order to create lines, initiate these steps again starting from Step 1. This will allow you to create new data points for the specific period you are interested in. By connecting the data points to each other, you will see the “cloud” start to come together.

Takeaways

The Cloud is an integral part of the technical indicator as a whole and helps traders and investors identify the specific calculations made to the chart. Price below the cloud indicates a downward trend, whereas price above the cloud indicates an uptrend. These trend signals can strengthen if both the cloud and the price are moving in the same direction. Similarly, the signals can weaken if the cloud is moving in the opposite direction.

What to look for

By using various averages, the Ichimoku Cloud indicator gives traders and investors key and extensive data information. Trends are high when price is above the cloud, weak when price is below the cloud, or transitioning when price is seen inside the cloud.

As was mentioned in the Calculation section above, when Leading Span A falls below Leading Span B, we can confirm a downtrend. The cloud, in this case, displays a red hue. When Leading Span A is above Leading Span B, we can confirm an uptrend. The cloud, in this case, displays a green hue.

The Ichimoku cloud can be used with other technical indicators in order to better assess risk. By looking at larger trends, with the help of multiple indicators, traders are able to see how smaller trends can fit within the general market picture as a whole.

Limitations

With all of the lines and cloud shading and data points, the chart can look a little crowded and stuffy. In order to work through this, there’s software that can hide these lines so the chart looks cleaner for traders and all the information you’d like to see is at the forefront of the chart. At TradingView, we have special features available for all our users. Anyone using our platform can pick which lines and backgrounds they’d like shown and can also customize the color, line thickness, and opacity with a simple click.

Due to the indicator being rooted in historical data. Even though data points and averages can be plotted in the future, there’s nothing that can calculate anything predictive for future market trends. This in itself is a limitation of the Ichimoku Cloud.

The final limitation that we will go over is the fact that the cloud can end up proving irrelevant and somewhat useless while price remains at a fixed rate; either below or above the cloud for an extended period of time. This is when other lines, such as the conversion line or base line, will prove important. This is because they generally conform more to price levels.

Summary

The Ichimoku Cloud holds a variety of technical indicators that signal support and resistance levels along with trend direction and momentum. The indicator utilizes multiple averages to predict support and resistance levels within the market and can be used in combination with other indicators to give more conclusive data and monitor risk.