The Ichimoku Cloud, also referred to as a one glance equilibrium chart, increases the probability of trading drastically. How so?
It isolates higher probability trades in the Forex market by excluding more false signals requiring greater confirmation prior to generating a signal.
The Ichimoku Cloud does this by integrating three signals into one chart, enabling traders to make the most informed decisions. The application has been used effectively in the Eastern world especially in Japan for decades before progressing to the Western world. Integrating the Ichimoku cloud and Japanese Candles provided a powerful combination for generating trading signals.
Before trading successfully on the Ichimoku chart, a primary understanding of its components is necessary. Originally, it was constructed by a Tokyo journalist – Goichi Hosoda, with a number of mathematicians running multiple calculations. After three decades of research, Hosada completed the Ichimoku Cloud and brought it out to the Japanese market where it began.
Initially when one looks at an Ichimoku chart, the abundance of the lines drawn may seem confusing. However, the components can be easily identified and translated with just a few simple steps.
The Components of Ichimoku Cloud System
The Ichimoku cloud trading system is essentially made up of five components offering the main insight into Forex trading price action to traders. The five components that we will look into are:
- The Tenkan Sen/conversion line
- The Kijun Sen/base line
- Senkou Span A/leading span 1
- Senkou Span B/leading span 2
- Chikou span/lagging span
The tenkan/conversion line is determined averaging the highest high and lowest low during the previous nine periods, contrary to using the closing prices in most moving averaging systems.
Similarly, the kijun/base line is calculated by averaging the highest high and the lowest low. Despite the calculation being similar, the kijun sen takes the prior 26 periods into account.
The third line which is the Senkou span A also referred to as the leading span 1 forms one of the boundaries of the Ichimoku cloud or what is called the Kumo. The senkou span A/leading span 1 line is determined by calculating the average of the tankan and kijun. It is then projected 26 days into the future.
The fourth line which is the Senkou span B/leading span 2 forms the other boundary of the cloud. The Senkou span B/leading span 2 is determined by calculating the average of the highest high and the lowest low over a period of the previous 52 days. It is then plotted 26 days into the future.
The space between the two leading spans (senkou span A and B), represents the cloud also referred to as Kumo in Japanese. These two spans are projected into the futue to capture the principle of a trend. The projections provide Forex traders with a preview of where the trend support or resistance falls.
The Chikou span/lagging span which is the fifth line, is the current daily closing price projected into the past by 26 days. This lagging span measures the strength of the signals created by the other components.
Figure 1: Ichimoku Cloud Components
Generally, the Ichimoku cloud charts give traders a simple but powerful method to gauge the directional trend of a market. It also provides a powerful tool for identifying key support and resistance levels. Forex traders can anticipate the likely future price trends depending on the location of the cloud. The Ichimoku Cloud is still developing among western traders due to the lack of quality material out there on it. But its high level of accuracy, along with ability to spot future support and resistance levels, along with trending and reversal signals are making this a popular tool for traders looking to gain an edge.