The Ichimoku Cloud, also known as Ichimoku Kinko Hyo (meaning "one glance equilibrium chart" in Japanese), is a comprehensive technical indicator that provides information about support, resistance, trend direction, momentum, and trading signals all in one view. Developed by Japanese journalist Goichi Hosoda in the late 1930s, this powerful system has become increasingly popular among Western traders. This guide will help you understand and use the Ichimoku Cloud effectively.
What is the Ichimoku Cloud?
Unlike most indicators that show just one piece of information, the Ichimoku Cloud is an all-in-one trading system. It consists of five lines and a shaded area (the "cloud") that together give you a complete picture of price action, trend, momentum, and potential support/resistance levels.
The simple version: The Ichimoku Cloud tells you the trend direction (price above or below the cloud), trend strength (cloud thickness and color), and potential entry/exit points (line crossovers). Green cloud = bullish, red cloud = bearish, price above cloud = uptrend, price below cloud = downtrend.
The Five Components of Ichimoku
1. Tenkan-sen (Conversion Line)
The Tenkan-sen is calculated as: (9-period high + 9-period low) / 2
This is a short-term signal line that shows momentum. It reacts quickly to price changes and is similar to a 9-period moving average of the midpoint.
2. Kijun-sen (Base Line)
The Kijun-sen is calculated as: (26-period high + 26-period low) / 2
This is a medium-term trend line that serves as support/resistance and a signal for trend direction. It is slower than the Tenkan-sen.
3. Senkou Span A (Leading Span A)
Calculated as: (Tenkan-sen + Kijun-sen) / 2, plotted 26 periods ahead
This forms one edge of the cloud and represents the midpoint between the Conversion and Base lines.
4. Senkou Span B (Leading Span B)
Calculated as: (52-period high + 52-period low) / 2, plotted 26 periods ahead
This forms the other edge of the cloud and represents longer-term equilibrium.
5. Chikou Span (Lagging Span)
The current closing price plotted 26 periods back
This shows how current price compares to price 26 periods ago, helping confirm trend direction.
Understanding the Cloud (Kumo)
The area between Senkou Span A and B creates the "cloud":
- When Span A is above Span B: Cloud is green (bullish)
- When Span B is above Span A: Cloud is red (bearish)
- Thick cloud: Strong support/resistance, harder to break through
- Thin cloud: Weaker support/resistance, easier to break through
Reading the Ichimoku Cloud
Determining Trend Direction
- Price above cloud: Uptrend. Look for buying opportunities.
- Price below cloud: Downtrend. Look for selling opportunities.
- Price inside cloud: Consolidation/no clear trend. Avoid trading.
Assessing Trend Strength
- Green cloud ahead: Bullish outlook for future price action
- Red cloud ahead: Bearish outlook for future price action
- Cloud twist (color change): Potential trend reversal coming
Confirming with Chikou Span
- Chikou above price: Confirms bullish momentum
- Chikou below price: Confirms bearish momentum
- Chikou crossing price: Potential momentum shift
Ichimoku Trading Signals
1. The TK Cross (Tenkan/Kijun Crossover)
The most common Ichimoku signal:
- Bullish TK Cross: Tenkan-sen crosses above Kijun-sen (buy signal)
- Bearish TK Cross: Tenkan-sen crosses below Kijun-sen (sell signal)
Signal strength depends on location relative to the cloud:
- Cross above cloud: Strong bullish signal
- Cross inside cloud: Neutral signal
- Cross below cloud: Weak bullish signal (or strong if shorting)
Example TK Cross Trade
You are watching stock ABC in an uptrend:
- Price is above the cloud (bullish environment)
- Tenkan-sen crosses above Kijun-sen
- Chikou Span is above price from 26 periods ago
- All signals align: Enter long position
- Place stop loss below the Kijun-sen
2. Cloud Breakout
When price breaks through the cloud:
- Bullish breakout: Price breaks above the cloud from below
- Bearish breakout: Price breaks below the cloud from above
Wait for the candle to close outside the cloud before entering. Breakouts through thin clouds are more likely to succeed.
3. Kijun Bounce
In a trend, price often pulls back to the Kijun-sen:
- In an uptrend, buy when price bounces off the Kijun-sen
- In a downtrend, sell when price bounces down from the Kijun-sen
- The Kijun-sen acts as dynamic support/resistance
Complete Ichimoku Trading Strategy
For the highest probability trades, look for alignment of multiple signals:
Strong Bullish Setup
- Price is above the cloud
- Cloud ahead is green
- Tenkan-sen is above Kijun-sen
- Chikou Span is above price from 26 periods ago
- All five conditions suggest bullish momentum
Strong Bearish Setup
- Price is below the cloud
- Cloud ahead is red
- Tenkan-sen is below Kijun-sen
- Chikou Span is below price from 26 periods ago
- All five conditions suggest bearish momentum
Ichimoku Settings
The traditional settings are 9, 26, 52, developed for 6-day trading weeks in Japan. Some traders adjust for modern 5-day weeks:
- Traditional: 9, 26, 52 (still widely used)
- Adjusted: 7, 22, 44 (for 5-day weeks)
- Crypto/Forex: 10, 30, 60 (24/7 markets)
Most traders stick with the traditional settings as they have proven effective across markets.
Using Ichimoku for Support and Resistance
The cloud provides dynamic support and resistance levels:
- Top of cloud: First level of support in uptrend, resistance in downtrend
- Bottom of cloud: Second level of support in uptrend, resistance in downtrend
- Kijun-sen: Key support/resistance level in trends
- Tenkan-sen: Minor support/resistance in strong trends
Common Mistakes to Avoid
- Trading against the cloud: Going long when price is below the cloud or short when price is above typically results in losses
- Ignoring the Chikou Span: This confirmation signal is often overlooked but adds valuable insight
- Trading inside the cloud: When price is in the cloud, there is no clear trend. Wait for a breakout.
- Using Ichimoku on very short timeframes: The indicator works best on daily charts or longer
Combining Ichimoku with Other Analysis
While Ichimoku is comprehensive, it can be enhanced with:
- Volume: Confirm breakouts with above-average volume
- RSI: Add momentum confirmation and divergence analysis
- Candlestick patterns: Look for reversal patterns at cloud boundaries
- Fundamental analysis: Combine with earnings and news for better context
Track Your Ichimoku Trades
Pro Trader Dashboard helps you track and analyze all your trades. See which Ichimoku setups generate your best returns and refine your strategy over time.
Summary
The Ichimoku Cloud is a complete trading system that provides trend direction, support/resistance levels, momentum readings, and trading signals all in one indicator. While it may seem complex at first glance, understanding the five components and how they interact will give you a powerful tool for analyzing markets. Remember to wait for signal alignment, avoid trading inside the cloud, and always use proper risk management.
Want to explore more technical indicators? Check out our guide on Keltner Channels or learn about the Parabolic SAR.