Ichimoku Clouds is a technique for technical analysis that combines several features into a specific graph. This method is used in candlestick charts as a trading tool that provides useful information about support and price resistance areas.
Ichimoku clouds are also used as a forecasting tool, and many traders use them when trying to determine the direction of future trends and the immediate movement of the market.
The Ichimoku Clouds were visualized and invented in the late 1930s by a Japanese journalist named Goichi Hosada; But this trading strategy was published in 1969 after decades of study and improvement.
Hosada called the strategy Ichimoku Kinko Hyo, a Japanese phrase that can be translated as “a balance sheet at a glance."
How does the Ichimoku cloud strategy work?
The Ichimoku cloud system displays data based on Leading and Lagging indicators, which consist of five lines:
Tenkan-Sen: Moving Average 9
Kijun-Sen: The moving average of the 26th period
Senkou Span A: The moving average of conversion lines and the basis that predicts 26 periods in the future.
Senkou Span B: The moving average of 52, which predicts 26 in the future.
Chikou Span: The closing price of the current course, which has planned 26 courses in the past.
The space between the A-front and the B-front is what creates the cloud, and this is probably the most prominent element of the Ichimoku cloud system. The two lines outline 26 future courses and predict price information. For this reason, Ichimoku clouds are classified as a leading indicator. On the other hand, the Chikou range is a delay indicator that outlines 26 periods in the past.
Clouds are usually displayed in green or red, making them easier to read. A green cloud is formed when the anterior region A is higher than the anterior region B, and vice versa, a red cloud is the result of the opposite position of the green cloud.
It is noteworthy that, unlike other methods, the moving averages used by the Ichimoku cloud strategy are not based on the closing price of the candelabra; Instead, these averages are calculated based on the upper and lower points that are recorded within a period. For example, the standard equation for a 9-day conversion line is as follows:
Conversion Line= (9d high + 9d low)/2
Ichimoku cloud settings
After more than three decades of research and experimentation, Goichi Hosada concluded that the settings (52, 26, 9) yielded the best results. At the time, Japan's business plan also included Saturdays, so the number 9 provided a week and a half. Numbers 26 and 52 provided one and two months, respectively.
Although these settings are still common in most trading spaces, chart experts are always able to set them up for a variety of strategies.
In digital currency markets, for example, many traders adjust the Ichimoku settings to reflect a regular, uninterrupted market, and often change the settings to (60, 30, 10). Some go even further and consider the settings as (120, 60, 20) to reduce the wrong signals in this way.
There is still debate over how effective a change in settings can be. While some see logic as logical, others claim that leaving standard settings disrupts the system's balance and generates invalid signals.
Ichimoko Cloud Trading Signals
Immediate movement signals are generated according to the relationship between market price, Kijun-Sen, and Tenken-Sen. Immediate uptrend signals are generated when the conversion line and the market price, both or one of them, move above the base line.
Immediate downtrend signals are generated when both the baseline and the market price or one of them move below the baseline. The collision between the conversion line and the base line is often known as the TK cross.
Simply put, when prices are always above the Ichimoku clouds, they are more likely to be upward. Conversely, price movements at the bottom of Ichimoku clouds may be interpreted as a downward trend and indicate a downward trend. Sometimes there are exceptions, and when prices move sideways inside the cloud, the trend can be considered neutral.
Delayed range is another element that helps traders identify and validate possible trend reversals. This range provides information on the price behavior of the price and confirms the upward trend as it moves above market prices, and vice versa, as it moves below the price.
Usually the latency range is used in conjunction with other components of Ichimoku clouds, not alone.
Summary of Ichimoku clouds
Immediate motion signals
The market price moves up (up) or down (down) the baseline.
TK cross: The conversion line moves up (up) or down (down) the base line.
Process tracking signals
Market prices are moving up (down) or down (down) in Ichimoku clouds.
Cloud color changes from red to green (upward), and changes from green to red (downward).
The delayed range is above (up) or low (down) market prices.
Resistance and support levels
The Ichimoku Cloud Chart can also be used to identify areas of support and resistance. The A-front range usually acts as a support line during ascending trends and as a resistance line in downward trends.
In both cases, the candlesticks tend to move closer to the A-front range, but if the price moves into the cloud, the B-range range may act as a resistance or support line.
The fact that both precursors predict 26 periods in the future allows traders to predict areas of potential support and resistance.
The strength of the signals generated by the Ichimoko cloud largely depends on whether these signals are delivered in a more powerful process or when the price is corrected; A signal that is part of a stronger and clearer trend always has more power than a signal that is offered when price correction occurs.
In other words, if an uptrend signal does not occur in accordance with an uptrend, it may be misleading. Therefore, whenever a signal is generated, it is important to identify the color and position of the cloud. Trading volume is also something to consider.
Keep in mind that using Ichimoku with shorter time frames can create a lot of clutter and false alarms. In general, longer time frames (daily, weekly, and monthly charts) provide more reliable signals.
Also, combining Ichimoku clouds with Elliott waves is a good strategy for those who work with Elliott waves. Of course, Ichimoku's clouds aren't doing well in terms of finding Elliott's exit point; But to find the entry point in Elliott waves, we can say that it is the best tool.
He has spent more than thirty years building the Ichimoko system, which is currently used by millions of traders around the world.
Ichimoku clouds are used as a comprehensive graphical method to identify market trends. Frontal areas also help chart experts predict levels of resistance and possible support and momentum.
Although charts may be very complex and crowded at first glance, they are not as reliant on drawing (lines such as trend lines or Fibonacci) as other techniques of technical analysis. And despite ongoing discussions about Ichimoku's settings, using this strategy is relatively easy.
This indicator, like other indicators, should be used in conjunction with other techniques to properly validate trends and minimize trading risks.
The amount of information displayed by Ichimoku clouds may be a bit difficult for beginners; So beginner traders are advised to work with the main indicators before working with Ichimoku clouds.
Published and authored by FalconProfit.com
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