Trading With the Cloud
5 years ago forexsimulation 0
The Ichimoku cloud is actually an oscillator and not an indicator even though, compared with other oscillators, it is placed on the actual chart and not below as a regular oscillator. The overall indicator represents a state of equilibrium between current price and projected and historical prices, offering an overall view of the financial product it is being applied on. Any broker is offering the possibility to attach the Ichimoku oscillator to a chart, easyMarkets included.
The cloud or kumo is the most visible part and it is projected twenty-six periods ahead when compared with current prices. It has the purpose of showing future support and resistance levels and it has a trending feature: a green cloud favors bullish setups while a red one bearish conditions. The actual cloud is the result of two moving averages that are crossing each other, Senkou A and Senkou B. By the time Senkou A dips below Senkou B, the cloud turns bearish, and when Senkou A moves above Senkou B, the cloud turns bullish. The image below shows the Ichimoku cloud plotted on the EURUSD weekly chart and while it is not having green and red colors, the overall bullish or bearish idea can be seen.
Remember that when the cloud is turning, for the price this refers to twenty-six periods before that, as the cloud is being projected forward. Therefore, the bullish or bearish singles are to take from the nature of the cloud.
The image above shows the same EURUSD weekly chart and where the actual selling should be when the cloud turns bearish. Using the same principle, buying can be done when the price is turning bullish, respecting the same twenty-six period back in time for the actual entry.
The Ichimoku indicator is not only made of this cloud, though. There are other three averages, called Chinkou, Kinjun, and Tenkan. In the chart above, these are the green, blue, and red line respectively. The Kinjun and Tenkan lines are showing strong trending markets and in such a trending environment the Tenkan is always above (in a bullish trend) or below (in a bearish trend) Kinjun. Spotting trend reversals should be easy from this point of view as all eyes should stay on the Kinjun/Tenkan cross. A bullish cross between the two lines signals a weakening of the previous bearish trend, while a bearish cross tells the upward trend is about to end of at least some consolidation will follow. If the cloud is projected twenty-six periods ahead of the actual prices, the Chinkou line, the green one, is actually projected back in time and it is calculated based on historical price plus taking into account current levels as well. Chinkou will always have the same value as current price level only it will not show the shadow of the current candle, but only the closing. From this point of view, it is a tricky line to consider but once integrated into the overall analysis, it is offering tremendous value to any forecast. The Ichimoku cloud comes from the Japanese approach to technical analysis and it was quickly embraced by the West as well due to the fact that it is able to forecast future support and resistance levels.
After all, this is all that matters in trading, right? To be able to forecast future prices and, if possible, where to add to an already open position. Another way to use the cloud is to look for actual candles to hit the projected cloud, and if this is happening from below the cloud, then the lower and upper edges of the cloud represent resistance. On the other hand, when the price is falling and reaches the projected cloud, it should find support on its two edges. Ichimoku cloud can be used together with other oscillators as well, for example looking for bullish or bearish divergences to appear but before trading them, confirmation from the cloud should come. A bearish divergence happening with the cloud being also in a bearish stance represents a stronger signal than just the simple divergence will indicate. The Japanese approach to technical analysis opened a new way to look at prices, and Ichimoku represents just one of the multiple approaches out there. Japanese candlestick techniques are famous among traders as market tops/bottoms can be identified easily.
The usual caveat applies here as well: the bigger the time frame, the more powerful the signals should be. It is one thing to look at the Ichimoku cloud on the monthly chart and trying to go long or short based on what the cloud is showing, and another thing to do the same thing on the hourly chart. The time frames simply do not match.
One can use though multiple time frames analysis. This means that, for example, if the monthly chart is giving a bullish signal, the confirmation (actual entry level) should be taken from a lower time frame, like the four hours chart or even the daily one. By doing this, the entry is earlier than the monthly chart would otherwise indicate and the risk of missing the newly trend disappears. What’s important when trading with the Ichimoku cloud is to understand the fact that it is both a trend indicator as well as an oscillator. Markets are not moving in a straight line and corrections will always take place. This indicator allows you to properly understand where corrections should meet support or resistance and therefore where it is wise to add a new position to an already strong trend before it will resume. To sum up, the cloud is one of the best indicators to spot future support and resistance levels and there is virtually no trader out there that didn’t hear about it. Understanding its importance is key for successful trading.
Summary: One of the most effective indicators is the Ichimoku cloud as it is having a lot of applications when trading financial markets. It is offering tremendous support and resistance level and there are many things to consider when applying it to a chart.