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What is the Ichimoku Cloud technical analysis indicator?

By Matthew Smith

Feb 16, 2023

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The Ichimoku indicator is one of the most popular in a wide range of technical analysis tools. It provides numerous signals, including support and resistance, trend direction, and momentum. Some newbies avoid Ichimoku because it consists of many elements. However, if you learn them, you can find reliable signals to use.

Ichimoku indicator: basics

If you doubt whether you should trade, you can look at the creator of the Ichimoku indicator. This technical analysis tool was developed not by an investor, as most indicators, but by a journalist. Goichi Hosoda, a Japanese journalist, published information about Ichimoku in the late 1960s.

The Ichimoku indicator isn’t only about the Cloud. It consists of five lines — aside from the Cloud, which is built by two lines, it includes three lines that can’t be ignored.

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Tenkan-sen or turning line (blue). It’s a 9-period average.
Kijun-sen or baseline (red). It’s a 26-period average.
Senkou Span A. It’s an average of the 9-period and 26-period averages and one of the lines that comprise the Ichimoku Cloud. The line is shifted some periods to the right.
Senkou Span B. It’s a 52-period average shifted some periods to the right, and the second line comprises the Cloud.
Chikou Span or lagging line (green). It’s a line that is moved some periods back.

Note: these are standard periods. They can be changed according to your trading strategy.

Senkou Span A and Senkou Span B are shifted to the right. Therefore, the Cloud provides signals on the future price direction. Tenkan-sen and Kijun-sen are just averages; therefore, they reflect the current price conditions. Chikou Span is shifted back, so it stands for a past price.

Ichimoku indicator signals

As the indicator consists of four elements, it provides a wide range of signals.

Cloud

When looking at the Cloud, you can identify the current trend and get signals on the future price direction. Although the colors of the Cloud reflect the trend — the green Cloud stands for a bullish trend, while the red Cloud reflects a bearish trend (1), it’s worth knowing how Senkou Span A and Senkou Span B interact. The trend is bullish when Senkou Span A rises above Senkou Span B. Conversely, when Senkou Span A falls below Senkou Span B, the trend is bullish.

Aside from the color, you should consider the Cloud’s width. If the Cloud is wide, the strength of bulls or bears is strong. If the Cloud is thick, the trend is expected to change.

When the price moves within the Cloud, its boundaries can serve as support and resistance levels.

Tenkan-sen and Kijun-sen

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Tenkan-sen and Kijun-sen, turning line and baseline, represent the current price movement and medium-term momentum. The baseline is more critical for price direction signals as it has a bigger period. It’s a common rule that the price interacts with shorter-period averages more often, which may provide additional market noise and lead to wrong signals. Therefore, traders pay attention to where the price is related to the baseline. If it crosses the baseline, the trend may change shortly.

Also, to buy and sell, traders use line crosses. When the turning line rises above the baseline, it’s a buy signal. Conversely, when the turning line falls below the baseline, it’s a sell signal (2).

Chikou Span

Chikou Span or the lagging line can’t signal a future price direction, as it’s shifted back. Still, traders use it to confirm the overall trend.

When the lagging line breaks above the price, traders may consider it a buy signal. If the lagging line falls below the price, it may be a sell signal (3).

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Final thoughts

Ichimoku Cloud is a popular technical analysis tool. It provides various signals, can be used regardless of the asset you trade, and can be applied to any timeframe. Still, it doesn’t guarantee it provides only reliable signals. Therefore, you should always combine it with chart patterns and other indicators.