Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XV the focus will be on Ichimoku Clouds.
The Ichimoku Cloud
The Ichimoku Cloud were developed by Goichi Hosoda in the late 1960s, and are a collection of technical indicators which are used to show the support and resistance levels of an asset, along with the momentum and trend direction of said asset. This is achieved by taking multiple averages and plotting them onto the chart. The lines on the chart make up five lines overall, two of which are part of the cloud. The figures are used within a formula to create a cloud, which is used to forecast where the price may find support and resistance levels going forward. It can be complicated to understand when a trader starts using initially, but once familiar it can often be considered very easy to understand and complete with well defined trading signals.
Calculating Ichimoku Cloud
To calculate the Ichimoku Cloud indicator a trader needs to plot the five lines which are part of it. These are shown and named below:
TenkanSen (Conversion Line): (High + Low) / 2 default period = 9
KijunSen (Base Line): (High + Low) / 2 default period = 26
Chiku Span (Lagging Span): Price Close shifted back 26 bars
Senkou A (Leading Span A): (TenkanSen + KijunSen) / 2 (Senkou A is shifted forward 26 bars)
Senkou B (Leading Span B): (High + Low) / 2 using period = 52 (Senkou B is shifted forward 26 bars)
*The High is the highest price point in the chosen period, which is generally 9 periods.
*The Low is the lowest price point in the chosen period, which is generally 9 periods.
To work out the Ichimoku Cloud for yourself, a trader simply follows the following steps:
- Calculate the Conversion Line and the Base Line.
- Use these calculations to work out Leading Span A. Plot this 26 periods into the future on the chart.
- The same applies to Leading Span B, which is also plotted 26 periods into the future on the chart.
- To apply the lagging span, a trader takes the closing price and applies it 26 periods into the past on the chart.
- Colour is applied between Leading Span A and Leading Span B to create the cloud.
- When Leading Span A is above Leading Span B, the cloud is given a Green colour.
- When Leading Span A is below Leading Span B the cloud is given a Red colour.
*Repeat these steps for every new period to create the lines by connection the new data points of Leading Span A & B with the previous ones.
How to use Ichimoku Cloud
The Ichimoku Cloud is composed of five lines/calculations. These are plotted onto the chart, two of which make up the Kumo (cloud). These lines are made up of a nine-period average, a 26-period average, an average of those two averages, a 52-period average, and a lagging closing price.
Traders make use of these lines on the chart to read opportunities for entering and exiting traders. The Kumo (cloud) is the key part of the indicator, as a general rule to follow is when the price is below the Kumo (cloud), the asset is in a downtrend. When the price is above the Kumo (cloud), the asset is considered to be in an uptrend.
To strengthen this trend further the user takes note of the direction of the Kumo (cloud). If the Kumo (cloud) is moving in the same direction as the price, it is considered a signal of strength for the trend. If the Kumo (cloud) is moving in the opposite direction of the price, it can be used as a signal that the trend is weakening or about to go into a reversal. An example of this would be during an uptrend, when the top of the Kumo (cloud) is moving upwards while at the same time the price is increasing. The angle is also very important, where a steep upwards or downwards angle will also give strength to the trend.
Users need to also be aware that the way Senkou (Leading Span A & B) lines are plotted means the the clouds they form are plotted 26 periods ahead of the most recent price action. This means a user can quickly identify where future resistance and future support may possibly be for the chosen asset.
The Chiku Span (Lagging Span) on the other hand can be used as a signal, with users noting when the Chiku Span (Lagging Span) line rises from below the price action and cross above it that a buy signal is formed. The same is applied when the Chiku Span (Lagging Span) crosses below the price action to make a sell signal. By placing it 26 periods prior on the chart a user can simply see how the difference in price and level has changed over time.
The TenkanSen (Conversion Line) is also a very useful part of the indicator, as it can be used to identify support and resistance levels. It is not a simple moving average, instead it is a measure of the average of a price’s highest high and lowest low for the previous 9 periods. This gives more stable support levels, and when the TenkanSen (Conversion Line) takes a sharp angle of ascent it can signal strong momentum upwards, while a steep angle of descent displays strong momentum downwards.
The KijunSen (Base Line) is similar to the TenkanSen (Conversion Line) but is based off of 26 periods instead of 9, and is therefore generally regarded as being more accurate because of the longer time span. Simply view the direction of the TenkanSen (Conversion Line) to figure out which way the trend is moving. It can also act as a level of support or resistance.
To break it all down into more easy and less of a mouthful, below are the key points for using the Ichimoku Cloud indicator:
Buy signals are generated when prices rise above the cloud, the cloud turns green, prices rise above the 26-period Kijun Sen, or the shorter term Tenkan Sen line rises above the Kijun Sen.
Conversely, sell signals are generated when prices fall below the cloud, the cloud turns red, prices fall below the 26-period Kijun Sen, or the Tenkan Sen line falls below the Kijun Sen.
Courtesy of Financhill website, the below image are the key rules for using the Ichimoku Cloud. It can be located on their website here.
Below is an example of the Ichimoku Cloud being used on the BTC/USDT 1 hour chart from Binance. There is no specifics that say it must be used on a certain time period, I just chose this for the example.
The lines have been coloured as follows to make it easier to follow:
TenkanSen (Conversion Line): Blue
KijunSen (Base Line): Yellow
Chiku Span (Lagging Span): Purple
Senkou A (Leading Span A): Green
Senkou B (Leading Span B): Red
The clouds are set to Green and Red also. Remember you can use whatever colours you prefer, these are just the ones I chose to make use of.
In the notes I have highlighted some of the key signals, mainly where the Conversion Line and Base Line cross, while also the points where the price moves above the cloud.
The image above shows the Ichimoku Cloud in use, with a variety of different signals highlighted to show where a trader should enter a long or a short trade. I have also tagged each line to give a better idea as to what you are looking at. While it might seem like a very busy and complicated chart to understand, simply getting familiar with the meaning and use of each line along with the signals can make it a very effective piece of TA when trading.
This second image is to point out what the Ichimoku Cloud looks like when a trader is using it in the moment. The Senkou A & B (Leading Span A & B) are clearly shown how they plot 26 periods into the future. This is where a trader can make beneficial use of the predictive nature of the indicator in seeing where they expect future support and resistance lines to be. Similarly, you can see the Chiku Span (Lagging Span) which gives a clear comparison of the current price action compared to where it was 26 periods prior.
Limitations of Ichimoku Cloud
While the Ichimoku Clouds can make the candlestick chart look very crowded and busy due to all the lines, they are imperative to understanding and reading the indicator. Some traders choose to hide some of the line so they can focus more on the ones they need, generally along with the other indicators they have on their chart. For example, all of the lines can be hidden except for Leading Span A and Leading Span B because they create the cloud. A trader needs to focus and decide which lines provide the most information for their trading strategy, and then consider hiding some or all of the lines which are distracting.
Another limitation of the Ichimoku Clouds is the fact they are based off of historical data. While these data points are plotted in a future basis, they are only predictions and cannot be taken as a guarantee. The formula itself is not predictive, instead it merely plots averages from the past into the future.
Finally, there can be long periods of time where the clouds are seen are irrelevant due to the price remaining above or below it. At times like these, the conversion line, the base line, and their crossovers become more important, as they generally stick closer to the price. This contradicts the initial idea of turning off all lines which can be considered a distraction, as they become the most relevant in this moment.
Conclusion on using Ichimoku Cloud for TA
As a trader, whether it be day trading or long term trading, using the Ichimoku Cloud indicator can be very beneficial in spotting the overall direction of a tend, while also indicating any potential upcoming changes to the trend. The Ichimoku Cloud indicator is shown from five seperate calculations which are applied onto the trading chart, and a cloud is formed between two of the lines created. The lines all have different applications, with some set periods into the future and some set periods into the past. A trader can make use of all the lines or just a specific few to make the most of the Ichimoku Cloud indicator. These lines and clouds can be used to identify trends, the strength of a trend, reversals, and support and resistance levels of the chosen asset. While the Ichimoku Cloud indicator can be more balanced than using a traditional simple moving average, users still need to be aware that the information is based of historical data and therefore can never be 100% accurate at predicting what will happen next. Therefore users should use the Ichimoku Cloud indicator along with other technical indicators to give stronger results and more reliable signals, especially trend indicators.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals with a large number of cloud changes or line cross when using the Ichimoku Cloud indicator. The info can never be correct all the time and therefore a supposed reversal or change in trend may not always take place.
It is important to use the Ichimoku Cloud indicator along with other TA to get the correct signals for understanding the strength of a trend along with support and resistance levels. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend strength via the Ichimoku Cloud indicator, along with checking the trend strength of the larger overall trend compared to short term ones.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis Part X - Parabolic SAR Indicator
Technical Analysis Part XI - Support & Resistance Levels
Technical Analysis Part XII - Fibonacci Retracement Levels
Technical Analysis Part XIII - The Awesome Oscillator
Technical Analysis Part XIV - The Arnaud Legoux Moving Average
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on how to read and trade using footprint charts instead of traditional candlestick charts. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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