Ichimoku Cloud Strategy: The Ultimate Guide

A Japanese candlestick charting technique is used to determine if a specific asset's current trend will continue the Ichimoku Cloud Strategy.

You will learn about the Ichimoku indicator in this article and how you can use it to trade. While it may look complex at first glance, it can give traders valuable information. It is yet one of the most popular technical indicators worldwide.

Ichimoku cloud: what is it?

Developed in the 1930s by journalist Goichi Hosoda, the Ichimoku Cloud is a popular technical indicator. Even though it wasn't publicly released until 1969, it's still widely used today by traders worldwide. 

There is a theory that the indicator works well when applied to the Japanese Yen currency pairs and the Nikkei 225, as these are the most commonly traded instruments in Japan.

It can provide traders with various information due to its name, "One glance equilibrium chart."

Ichimoku clouds strategy: how does it work?

As soon as Tenkan Sen and Kijun Sen are clearly over the Cloud, the issue is biassed towards the positive. On the other hand, below the Cloud, Tenkan Sen and Kijun Sen have a negative bias.

The bias is up when prices are above the Cloud. The bias is down when prices are below the Cloud. A bullish bias is reinforced when Senkou A transcends Senkou B. If Senkou A is falling and Senkou B is below it, the downtrend is strengthening!

If the Tenkan Sen crosses above the level of Kijun Sen, the price is above the Cloud, and the Kijun Sen and Tenkan Sen.

One can look for a strong sell signal when the Tenkan Sen crosses below the Kijun Sen, when both the Tenkan Sen and Kijun Sen are above the Cloud, and when the price is under the Cloud.

The formula for Ichimoku clouds

You can somehow easily interpret the meaning of the Ichimoku Cloud if you know the relationship between its five segments.

Ichimoku cloud analysis on bitcoin daily chart

Formulas are written with generic parameters, and we will define exact values or settings for Ichimoku cloud in a subsequent post.

Faster Tenkan-Sen (Conversion Line)

Its formula is: Tenkan-sen is a faster moving average, which is calculated as follows: 

(x-period high + x-period low)/2

Slower Kijun-Sen (Base Line)

The formula for Kijun-sen is the same as that for Moving averages: 

(y-period high + y-period low)/2

The Y>X ratio indicates that Kijun-Sen (Conversion Line) is moving slower than Tenkan-Sen (Base Line).

Senkou Span A (Leading Span A) – Faster

Baseline minus Conversion Line is the average, and its formula is: (Conversion Line - Base Line).

The Senkou Span A (Leading Span A) is a leading span since it is plotted y periods in the future, and it forms the faster boundary of the Cloud.

We plot Senkou Span A numbers on the right-hand side of the chart.

Senkou Span B (Leading Span B) – Slower

In other words, Senkou Span B (Leading Span B) is the average of two years' highs and lows. Its formula is: (2y-period high + 2y-period low)/2

A leading span is a span that is plotted y periods in the future, so it forms a lower boundary of the Cloud.

On the right side of the trading cloud chart, we plot the Senkou Span B number.

Senkou Chikou Span (Lagging Span)

In the past, Chikou Span was close to plotted y periods. Therefore, we can analyze this line to see where recent candlesticks closed and current support and resistance levels.

Plotting the Ichimoku cloud on a chart, what does it look like?

Trading charts "clean" to prevent information overload may concern traders who initially view this indicator as complex. However, it is unnecessary to use many additional indicators since the Ichimoku indicator shows us quite a bit.

Plotting the Ichimoku cloud on a chart

Ichimoku cloud trading strategies

This was just a general description of the above sections' entry/exit trading signals. There are some specific trading strategies for Ichimoku clouds that can help you learn about this indicator's potential.

Ichimoku Cloud Edge to Edge Strategy

Edge to edge is an Ichimoku cloud strategy that is relatively simple but requires some requirements to succeed.

A candlestick will touch or pass the other edge of the Cloud whenever it enters a cloud, and its price closes in it.

While edge to edge is not a complex strategy, you should check the history of the strategy on the chart you plan to use before relying on it.

Netflix stock chart follows this strategy reasonably well in different markets. This image shows the Netflix chart in the two hours of timeframe. According to this chart, using edge to edge strategy, you can win 13 out of 15, equating to 86%!

For the sake of being conservative, we used double Ichimoku cloud settings.

Ichimoku Cloud Kijun Bounce Strategy

Ichimoku cloud strategy known as Kijun bounce has some similarities to moving averages trading strategies. For example, the price typically touches the Kijun (Baseline) during an uptrend/downtrend on any security.

In this case, we have two instances:

• It is recommended to place your buy orders on the Kijun (Baseline) during an uptrend or bullish market.

• A bearish market or downtrend calls for the Kijun (Baseline) to be your sell stop.

During the epic uptrend of bitcoin in 2017, we analyzed Kijun bounce strategies. Looking at the 4-h time frame chart, we noticed the bitcoin price touched Kijun five times during this uptrend.

Ichimoku Cloud C Clamp Strategy

Kijun bounce strategy and C clamp strategy are similar in some respects.

If the gap between the baseline (Kijun) and the conversion line (Tenken) increases too much, the market will undergo a price correction to close the gap.

This strategy was named after the shape of the clamp tool. It is pretty similar to the head of a clamp that the gap between Kijun and Tenken resembles.

C clamp strategy prevents:

1. In the overbought regions, opening an extended position.

2. Opening short positions in oversold areas.

3. RSI and C clamp are not the only indicators you can use to identify divergences.

We examined the Amazon stock chart below for the three hours of periods. We had a price correction to close the gap between the Conversion Line and the baseline as the difference between the two increased.

Ichimoku cloud strategy: how to use it in trading?

Ichimoku cloud trading strategy is designed to keep traders on the right side of the market. You can follow the bias for as long as you want with our trading method. 

Swing trading is best suited to the Ichimoku framework. It does so by maximizing benefits while limiting the risks associated with trading. Here is how to determine which swing is the right one.

As we do not gain some preference plot, the best time range for Ichimoku Kinko Hyo is most suitable for you. Using this swing trading method from the earliest starting point, you will ride the bias. This will also allow you to maximize profits.

We are going to demonstrate a buy trading strategy in this article. However, it can be applied to sell setups as well.

Step 1:

Watch for the price to cross above the Ichimoku cloud-first. There is a bullish sign here and a possibility that another uptrend may be starting. However, the Ichimoku cloud highlights support and resistance levels. 

When the price breaks above the Cloud, it marks the beginning of an up-trend, and when it breaks below the Cloud, it marks the beginning of a down-trend.

Step 2:

The breakout of the price over the Cloud needs to be followed by the intersection of the Tenkan and  Kijun lines. These two conditions must be met for a buy trade to be entered. An excellent depth indicator is the Ichimoku Cloud. Moving average intersects even calculated using the marker.

Step 3:

The Ichimoku strategy generally follows long positions when the price trades above the Cloud. There is a need to add a copulation factor before locking up a trade. Therefore, we buy after the next candle opens.

Step 4:

Our protective stop loss is ideally located beneath the low of the breakout candle. We implement two elements of this trading technique. Below is an example:

Cabalistically, it lowers the chance of losing significant amounts of money.

Trade with the order flow of the market is helpful for us.

We are attempting to take advantage of this trend by swing trading as much as possible. In addition, we will try to move our stop-loss level beneath the Cloud once a new crossover occurs in the inverse direction.

Step 5:

To stay at ease with the take-profit method, one manageable condition must be met. Our trade needs to be closed when the Tenkan line crosses below the Kijun line. If you decide to hold off until then, the price might break under the Cloud. But you risk losing part of your gains. So occasionally, it would help if you were willing to lose a few things to acquire.

Relationship between Ichimoku cloud and Fibonacci retracement

Fibonacci retracement levels and the Ichimoku cloud indicator are related excitingly.

Kumo (the Cloud) forms a long horizontal line whenever an uptrend occurs. Therefore, if you draw a Fibonacci line from the beginning to the end of the trend, you will notice that they are aligned at the 0.5 Fib level.

On the chart below, we represent an uptrend in Ethereum, and we demonstrate the relationship between the 0.5 Fibonacci level and the Ichimoku cloud.

MT4 Ichimoku cloud indicator: how to add it?

To add the Ichimoku Cloud indicator to MetaTrader 4, follow these steps.

1. Open MetaTrader 4 on your computer

2. In the menu highlighted below, click the green plus sign

3. With your mouse, click on "Trend" and then "Ichimoku Kinko Hyo."

4. The parameters, colors, and visualization settings will appear in a new window.

5. Tenkan-sen is set at 9 by default, Kijun-sen at 26, and Senkou Span B at 52

6. The settings mentioned above can be adjusted, but the most common combination is mentioned above.

MT4 Ichimoku cloud indicator: how to add it?

Ichimoku cloud indicator, what is the best timeframe to use?

The Ichimoku Cloud indicator can use any time frame, and there is no "best" time frame. You can use any time frame that suits your trading style. For example, day traders may want to use the Ichimoku on the M5 or M15 chart to identify trends and find entry and exit signals. 

Traders with swing positions might prefer placing Ichimoku on H4 or Daily charts instead so that they can detect trends and key support/resistance areas. 

Ichimoku is most effective if the market is trending, which applies to all time frames.

Ichimoku cloud Kumo twist: what is it?

It would help if you remembered that backtesting differs from live trading or forward testing when using a trading indicator.

On a historical chart, you can see if there are apparent changes in the bearishness or bullishness of the clouds by analyzing the Ichimoku clouds. But live trading is different.

No matter what timeframe you're considering, there are times when the market shows no signs of trending and prices range.

The clouds' momentum will change during those moments, so you don't know whether the next Cloud will be bearish or bullish.

Ichimoku cloud momentum is changed by Kumo twist. Therefore, it means that the green Cloud becomes red or vice versa. Therefore, it is essential to wait for the next Cloud to show its momentum when using the Ichimoku cloud in live trading. This is because that will help you to understand the price trend.

Using Ichimoku clouds for day trading and swing trading 

It is often asked if Ichimoku clouds are available for swing trading or day trading. You can trade on various time frames as long as you know what time frame you are trading on!

To provide day and swing trading opportunities, this trading indicator has many Kumo twists in the lower time frames, and it is likely to produce mixed signals.

As with other indicators, the win rate increases when you trade higher time frames. 

Ichimoku clouds work best with which other technical indicators?

Ichimoku can be used for entry/exit signals, and a variety of information can already be derived from it. Therefore, using many other indicators with the Ichimoku Cloud is unnecessary since that could lead to conflicting signals. 

On the other hand, an oscillator can indicate whether a market is overbought or oversold. Divergences between the oscillator and the price should also be looked for. Traders can use these indicators to determine price direction.

The Ichimoku cloud indicator's advantages and disadvantages

Pros

• Provides a Variety of Information - The Ichimoku Cloud indicator can provide us with various information, including trends, support and resistance levels, and momentum.

• Using fewer indicators - Ichimoku Cloud indicator does occupy quite a bit of space on the chart. Therefore, it will reduce your overall number of indicators. Thus, there will be fewer opportunities for signal conflict.

Cons

• Ichimoku Cloud Overload - Beginners may be overwhelmed by the amount of information provided. Understanding all its components and how to make the best use of them will take some time.

• Space of Chart - The Ichimoku Cloud indicator may be complex for traders who prefer a clean chart and concentrate on price action.

Related questions – FAQs

Is it an excellent strategy to use Ichimoku Cloud?

Although the cloud charts can produce different signals, empirical evidence suggests that the Chikou line crossing in the Ichimoku cloud is the most reliable and consistent.

When should Ichimoku be used?

Ichimoku can be used from a 1-minute chart, up to six hours for day traders and scalpers. Conversely, you can use Ichimoku on daily or weekly charts if you are a longer-term trader like me.

What is the purpose of Ichimoku among professional traders?

Professional traders make their living by catching significant moves in the markets. To capture the above-mentioned big moves, traders should watch the Ichimoku readings to ensure they remain in line with the overall trend.

What is the best time to enter Ichimoku Cloud?

As well as using other technical indicators, traders should use the Ichimoku Cloud as a risk-adjusted return indicator. When paired with the relative strength index (RSI), the indicator can confirm momentum in a specific direction.

Is Ichimoku a good day trading indicator?

A day trader or other person who must make a quick decision can benefit from the Ichimoku Cloud. When combined with the other technical indicators, such as the Relative Strength Index, the Cloud can provide traders with a complete picture of resistance and support.

Final thoughts

Ichimoku Cloud had made it possible to identify trends or upcoming countertrends. Through the Cloud, chartists could determine the trend first. Then, once a bias has been specified, the price plot, Tenkan line, and Kijun line are best for resolving relevant signals. 

Look for the Tenkan line to cross the Kijun line to identify the trend. In an impulsive bias, this sign may be present. But it can also be uncommon. More potential signals are visible by searching for price intersections with the Tenkan Line or Kijune Line. 

Ichimoku Cloud can be traded away in many ways, and this is only a basic overview of how to trade with Ichimoku Cloud.