Lost in the crypto jungle? Ichimoku Cloud can be your compass! With this guide, learn about this technical analysis tool that combines multiple indicators for valuable insights.
The Ichimoku Cloud is probably not on your list of indicators to dive into, as it may look quite complicated at first glance. Many traders, therefore, avoid it, even though it can yield valuable insights and is not as complicated to understand and apply once you get the hang of it.
The Ichimoku Cloud has been around for a while. Its history dates back all the way to the 1930s. However, it didn’t get published until the late 1960s by Goichi Hosoda, a Japanese journalist who spent close to thirty years improving the indicator.
What Is the Ichimoku Cloud?
An important note: rather than conventional moving averages that use the closing value of each candle, the Ichimoku indicator calculates moving averages using the midpoint of the previous X candlesticks. For example. The Tenkan-Sen is calculated by taking the high and low of each candle and dividing that by two.
As you can see, the area between the leading spans A and B has been colored depending on which of the two is above the other. The cloud is green when the leading span A is above the span B, and red when it is the other way around. This colored space is referred to as the Kumo Cloud, which is a unique feature of the Ichimoku system. After all, the cloud is using 26 candlesticks, giving it unique forecasting insights.
How To Use the Ichimoku Cloud in Trading?
With five lines and a cloud to look at, this might seem daunting at first. However, it looks more complicated than it is. The indicator produces two main types of signals: momentum and trend-following.
Let’s look at the trend-following signals first! To keep it simple, traders use the color of the cloud and its position relative to price as signals. When Bitcoin trades above a green cloud, the trend is considered bullish, and traders seek to buy when the price corrects into the cloud. In these scenarios, the leading span A can act as support or resistance.
Another trend-following tool is the lagging span (Chikou Span), which can help confirm trends and spot potential trend reversals. Usually, the Chikou Span moving above the market is considered a confirmation of a bullish trend, whereas it is seen as bearish when it moves below the market.
When it comes to momentum, these signals are derived from the baseline (Kijun-Sen), conversion line (Tenkan-Sen) and market prices. When either, or both the conversion line and market prices move above the baseline, it produces a bullish momentum signal. Contrarily, when the conversion line and/or market price move below the baseline, it signals a bearish momentum. These crossings between the conversion and baselines are referred to as TK crosses – short for the Tenkan-Kijun cross.
All the above signals should not be taken at face value. Even when only using the Ichimoku indicator, signals that go against the overarching trend have a decent likelihood of being a misleading or false signal. Essentially, bullish Ichimoku signals ideally are to be accompanied by a green cloud and bearish signals should ideally have a red cloud to match it.
The Ichimoku cloud has seen most of its use on the higher time frames, as the indicator was optimized for daily charts. Generally speaking, the intraday charts, therefore, result in a lower success rate when trading with the Ichimoku cloud.
Ichimoku Settings for Crypto Trading
As mentioned, Hosada developed and optimized the indicator for the daily chart. Another important caveat is that he developed this indicator for trading the Japanese stock market, which, at that time, operated from Monday through Saturday.
Therefore, the usual settings (9, 26 and 52) are based on six days a week. The number nine represents a week and a half, whereas 26 and 52 represent the business days in one and two months, respectively. As this is no longer accurate in both the stock market and in crypto trading, different traders use different settings.
All in all, the Ichimoku Cloud is a great charting tool that is – contrary to what it looks like at first glance – relatively easy to use. With this indicator, traders require very little additional analysis to make trading decisions. This makes sense, as Hosada dedicated over a third of his life to developing this indicator.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.