The Ichimoku cloud trading system is a visual technical analysis strategy. Think of the Ichimoku Cloud as a collection of technical indicators. And no, it’s not all 69 indicators jammed into one cloud – that would be a messy loud, but merely a select few.
What Is the Ichimoku Cloud Trading System Strategy?
The Ichimoku cloud trading system is a popular technical analysis indicator and strategy. It consists of 5 plots, the Kumo cloud, Tenkan-sen line, Kijun-sen line, Senkou Span A, Senkou Span B, and the Chikou Span.
The data plots are based on the average of the high and low over a specific period of time. These data plots are different for each line. Notice that the lines are similar to exponential moving average lines which traders also use to make trading decisions.
If you are looking to learn the Ichimoku cloud trading system then our Ichimoku trading strategies for beginners video will help you to get started. This is a popular Japanese indicator that’s incredibly powerful when stock trading. Many traders and investors alike use it to day trade, swing trade, and invest. Watch our webinar above to get an in depth overview on how this trading indicator works.
The Ichimoku system quickly and easily shows support and resistance, displays a stocks momentum, identifies the direction of the trend and offers trading signals. We are huge fans of the this system and love to refer to it again and again.
Lets take a quick look at the silver lining in this cloud.
Strategies: Ichimoku Cloud Trading System
The Ichimoku Cloud trading system consists of five chart plot lines total:
- Tenkan-sen line or Conversion line – which calculates the 9 period high and the 9 period low then divided by 2.
- Kijun-sen line or Base Line – calculated by taking the 26 period high and low and divided the numbers by 2.
- Senkou Span A or Leading Span A – this cloud line is created by taking the Conversion Line and adding the Base Line, then dividing by 2. It’s called leading span because it looks ahead 26 days to provide a floating cloud ahead of the current price of the stock.
- Senkou Span B or Leading Span B – calculated by taking the 52 period high and adding the 52 period low and of course, dividing by 2 again. This line forms the lower part of the cloud and moves slower, also 26 periods ahead.
- Chikou Span or Lagging Span – This line is very simply plotted 26 days in the past, hence, why it is a lagging line or indicator. Some people don’t really use this line, because, well its in the past.
Here’s a recent example of $AAPL:
You’ll notice the most eye-catching feature of the Ichimoku cloud trading system is the cloud, also known as the Kumo Cloud. The Kumo is essentially created by the Senkou Span A and B. They are both very similar to moving averages, with one slower, one faster, which create the cloud and make up its unique features.
Is Ichimoku Cloud Trading Strategy Good?
No, I would say it is great!!! The Kumo cloud gives a very helpful at a glance snapshot of price action. Kumo breakouts happen when price breaks out of the cloud. Price is bullish above the cloud and bearish below the cloud.
Kiss: Ichimoku Trading Strategies
Alright, let’s keep it REALLY simple here and talk about how we identify the trend.
When price is above the cloud, the trend is up and it’s …ready for it? It’s bullish! (for that specific time period chart – always refer to multiple charts for your desired time frame of trading!!) When it’s below, its bearish and the trend is down. Sounds simple right?
Pay attention to when candlesticks charts are trading sideways inside the cloud. This means that the trend is undefined and neutral, and therefore potentially more risky. This could be consolidation, or setting up for a move above or below the cloud.
The two spans essentially create a red or green cloud, depending upon which span is on top and which span is on the bottom. Clouds also appear in the future on your charts, which give you an idea of future levels of support and resistance!
Different parts of the cloud show support and resistance areas. Support and resistance is key in trading. See the example of $AAPL again below:
Now lets look at a bearish chart example, $TEVA:
Note how quickly we can identify support and resistance, and the overall trend. Currently investors are steering clear of TEVA (or shorting and buying PUTS). The cloud is clear resistance here and would not allow the price to bust through it So you would stay out of any long trades here..
What Is the Best Time Frame for Ichimoku Cloud Trading System?
The best time frame depends on the style of trader you are. Swing traders prefer the daily time frame, while a day trader will use the 15 minute or 5 minute charts.
We haven’t discussed the Conversion line and Base line much yet. These two lines (Blue and Red, respectively) can help traders and investors find entries and exits while trading with the Ichimoku cloud trading system. They are important for figuring out the stocks momentum, and timing your entry and exits.
It’s always important to take note where we are in regard to the cloud location; especially when looking at the conversion-base line pair. The trading signals these lines give us will be reinforced if these lines are above or below the cloud. Take our swing trading course.
An Example Of The Cloud In Action With $APPL
Look at the example of $AAPL above. We have several Conversion line, Base line crossovers, also known as TK crossovers (Tenkan-sen and Kijun-sen crossover):
As you can see, we have 3 bullish TK crossovers, accompanied by Kumo breakouts (cloud breakouts where price busts through the cloud). These breakout Ichimoku trading signals were great trading signals and reinforced by the overall bullish cloud uptrend of $AAPL.
There were some neutral periods of consolidation, but not much creation of a red cloud. Note how the Conversion line acts as the first line of support, followed by the Base line.
Traders and investors use the TK lines to trade the momentum! Can you see how simple this system is to use and why it is so popular among our community!? Learn how to do support and resistance live in our trading room. Check out the trading service that we offer.
Ichimoku Bullish And Bearish Signals
Lets summarize Bullish and Bearish signals in the Ichimoku cloud trading system:
- Price (candlesticks) breakout of the cloud to the upside (to the overall trend)
- Cloud converts from red to green
- Price action moves above the Base Line or Kijun-sen Line
- Conversion Line moves above Base Line or (TK crossover)
- Price moves beneath the Red or Green cloud.
- Cloud turns from green to red (possibly a new bearish trend forming!)
- Price Moves below Base Line or Kijun-sen Line
- Conversion Line moves below Base Line (TK crossover to the downside)
How Do I Trade With Ichimoku Cloud Trading System?
Trading the Ichimoku cloud trading system is simple and fun because it’s an all in one trading indicator which produces concise trading signals. Here how you trade it:
- Identify whether price is above, below, or inside the Kumo cloud
- Watch the Tenkan-sen or conversion line and Kijun-sen base lines location.
- Define the overall trend using the cloud
- The next step is to find your entry
How To Find Your Entry
- Wait for a period of consolidation or a pull back to the cloud support to get the best entry
- Go long when you see a bullish TK crossover
- Go short with a TK crossover to the downside if the consolidation or pull back period fails to hold
This shows the beginning of a potential trend reversal. Make sure to look into popular trading strategies such as gap and go techniques, dip buying strategies, and day trading options. Ichimoku can work as a complement to all types of trading strategies.
Putting The Could To Use
We will often use the Ichimoku cloud trading system with other indicators. You’ll notice one of our founders Tim Davis shares a lot of charts in our Facebook community. Tim has the Ichimoku cloud along with many other indicators he has found useful on his charts such as simple moving average lines, ema’s, vwap, macd, and on balance volume (OBV). Consider using diagonal spreads with Ichimoku for a fun direction trading strategy!
TrendSpider now has the Ichimoku cloud! Notice how I have both the weekly and the daily time frame clouds showing ? this is incredibly helpful to have this overlayed on ONE chart!! You can do this with TrendSpider!!
The important thing with trading and investing is to find systems that work for YOU. Whenever trying out a new system be sure to use a simulated trading system to test out your new skills prior to trading with real money. As a rule we say “if you can’t make money in a simulation what makes you think you can make money in the real market?” We recommend TD Ameritrade’s ThinkorSwim platform for simulated/paper trading. Or you can go with Webull if you’re interested in free commissions and get a free share of a stock when you sign up!
As always, feel free to reach out to us if you have any questions, or just comment below. Thanks for reading and please share this Ichimoku trading strategies article below if you’ve found it useful!No