How to Trade Ichimoku Cloud
The Ichimoku Cloud, or Ichimoku Kinko Hyo as it’s also known, is a handy tool that helps traders make sense of the stock market. It was created by a Japanese journalist named Goichi Hosoda back in the late 1930s. This guide will help you understand how to trade using the Ichimoku cloud. (source)
- Tenkan-sen (Conversion Line): This line is found by looking at the highest and lowest prices over the last 9 periods and finding the middle point.
- Kijun-sen (Base Line): This line is similar to the Tenkan-sen but looks at the last 26 periods instead.
- Senkou Span A (Leading Span A): This line is the average of the Tenkan-sen and Kijun-sen, plotted 26 periods into the future.
- Senkou Span B (Leading Span B): This line is the average of the highest and lowest prices over the last 52 periods, also plotted 26 periods ahead.
- Chikou Span (Lagging Span): This line is simply the closing price but plotted 26 periods behind.
The ‘cloud’ or ‘Kumo’ is formed by the space between Senkou Span A and Senkou Span B. The color of the cloud changes depending on whether Senkou Span A is above or below Senkou Span B.
Figuring Out Market Trends
One of the first things you can do with the Ichimoku Cloud is identify market trends. Here’s how:
- If prices are above the cloud, it means we’re in a bullish (upward) trend.
- If prices are below the cloud, it means we’re in a bearish (downward) trend.
- If prices are inside the cloud, it could mean that the market trend is neutral or about to reverse.
- Finding Support and Resistance Levels
The edges of the cloud can help you find potential support and resistance levels. In a bullish trend, Senkou Span A acts as the first support level while Senkou Span B acts as the second support level. In a bearish trend, their roles are reversed.
Spotting Trading Signals
The Ichimoku Cloud can also give you trading signals:
- Bullish Signal: When the Tenkan-sen line crosses above Kijun-sen line, it’s a sign to buy.
- Bearish Signal: When Tenkan-sen line crosses below Kijun-sen line, it’s a sign to sell.
- Strong Bullish Signal: If this cross happens above the cloud, it’s a strong sign to buy.
- Strong Bearish Signal: If this cross happens below the cloud, it’s a strong sign to sell.
Remember to align these signals with overall market trends for better trading decisions. We recommend reading this insightful article, where we’ve utilized the Ichimoku Cloud for a comprehensive market analysis. It’s an excellent resource to familiarize yourself with How to Trade Using the Ichimoku Cloud.
Wrapping Up
Trading with Ichimoku Cloud might seem complicated at first, but with practice, you’ll find it’s a great tool that can help you make informed trading decisions. As always, remember to use other technical analysis tools and risk management techniques to improve your trading performance.
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