Olymp Trade: The What, Why, and How of Trading with the Ichimoku Cloud
Learn to trade using the most comprehensive indicator, the Ichimoku Cloud!
The Ichimoku Cloud is an indicator that has been around since 1968 and gained much of its popularity throughout the 1970s. This article will explain the basics of using the Ichimoku cloud to trade more profitably.
Created in Japan by a Tokyo journalist and his team, this indicator provides more data than most other indicators. The Ichimoku cloud is often considered one of the most complex tools traders use. Though it may seem intimidating, with time and practice it will become a useful indicator for you.
What Is the Ichimoku Cloud?
The Ichimoku Cloud actually combines five components into one indicator, providing traders with more accurate quote development, and helping traders make better-informed decisions. Popular with new and experienced traders, the Ichimoku has a lot to offer any trader.
How To Use the Ichimoku Cloud
Intimidating to many, this indicator is powerful and in-depth. We will begin by looking at the Tenkan Sen and Kijun Sen lines.
1. The Tenkan Sen (red) line is calculated as the average of the highest high and lowest low (Hh+Ll/2) over the previous seven to eight time periods.
2. The Kijun Sen (yellow) line is calculated as the average of the highest high and lowest low (Hh+Ll/2) over the previous twenty-two time periods.
These two lines are to be used like moving average indicators. When the lines crossover, like the clear example above, a trend is coming to an end. Here we see the Kijun Sen (yellow) line cross below the Tenkan Sen (red) line indicating a coming downtrend. This is because near term prices are dropping below the longer-term price trend. Conversely, when the Kijun Sen crosses over the Tenkan Sen in an upward direction it indicates a likely uptrend.
Let’s move on to the indicator’s namesake component, the Ichimoku ‘cloud’. The Kumo or cloud is the area between the green and orange lines that shows both historical and current price movements at once. The final two components are the Senkou Span A and Senkou Span B.
3. The Senkou Span A (green) line is the average of the Tenkan Sen and Kijun Sen (TS+KS/2) plotted 26 time periods ahead of the current quotes.
4. The Senkou Span B (orange) line is the average of the highest high and lowest low over the past 52 time periods, plotted 26 time periods ahead of the current quotes.
The cloud they create acts as a broader range for support and resistance. This range allows traders to better judge the strength of trends by providing a support and resistance level based on previous price movements.
The price breaking through the cloud to move above or below indicates a strong trend. For forex and Fixed Time traders this is a signal to open a trade.
Looking at the chart above we see that as the price falls below the cloud it does continue the downtrend initially signaled by the Kijun Sen and Tenkan Sen lines crossing. Four of the five components confirmed the fall early on.
5. The final component is the Chikou Span (teal), a simple market sentiment indicator. Calculated by placing the most recent quotes 22 periods behind the current price.
The Chikou Span highlights the market’s sentiment by displaying the trend alongside the current price. Understanding the signals from this line is straightforward, while sellers control the market the Chikou Span will remain below the price trend while the opposite is the case when buyers have control.
Trading With the Ichimoku Cloud
Looking at the chart above let’s analyze where different signals came into play. In this example, the Chikou Span (teal) shows declining sentiment as the line fell and remained below the price. We can see where the Tenkan Sen (red) and Kijun Sen (yellow) cross twice, once indicating an uptrend and again showing the opposite. The price climbs along with the Kumo “cloud” for some time, using it as its support level before crossing it downward and confirming its downtrend while making the cloud its resistance level.
Catching the trend early will allow you to be more profitable and capitalize fully on the trends.
When trading forex you will want to see a close of a time period below the cloud before entering a short sell position, because we treat the cloud as a support/ resistance barrier. The best time to initiate a trade is after the price has broken through the cloud, as the price approaches the cloud it can reflect off of it and if you make your trade prematurely you could lose before you begin.
With Fixed Time Trades profitability lies with the Tenkan Sen and Kijun Sen lines. Often credited with first spotting a trend it is helpful to watch this pair and capitalize as trends shift.
Conclusion
The Ichimoku Cloud indicator is intimidating at first, but with some time and understanding, it can be one of the most useful indicators. Combining five components, it offers a more filtered view of price movements. Take the time to practice using this tool and it will be beneficial, as the Ichimoku cloud helps traders make less risky trades.
