Enter the mysterious cloud of Ichimoku in forex trading.

I’m going to clear the fog and demystify the Ichimoku Cloud for you so that you can add this excellent indicator to your trading arsenal. Ichimoku is a very useful, all-encompassing indicator—it is not only designed to clearly identify trends (or a lack of trend), but also to indicate market strength or momentum and to provide specific trade entry and exit points.

The Ichimoku Cloud—or Ichimoku Kinko Hyo—is often ignored by traders, especially beginning traders, only because all of its lines and colors (and clouds) makes it look a bit complicated, perhaps even daunting. But once you know how to use it, it’s really very simple. And helpful. And GOOD, as far as indicators go. For one thing, it’s not used by every other trader in the world—that alone means that using it can therefore give you a bit of a trading “edge.”

The Ichimoku has an interesting history. Rather than having been developed by a mathematician like nearly every other indicator, this one was thought up by a Japanese newspaper reporter, Goichi Hosoda. It was popularized in book form in 1968, but then it was mostly forgotten until the book was republished in 1996, leading to a new resurgence of interest in the Ichimoku Cloud. Now it is the most commonly used indicator in Japanese trading rooms. It’s interesting that Ichimoku is known as the “one glance” indicator by both its fans and detractors; its proponents refer to its ability to reveal market opportunities at a single glance . . . while people who shy away from using Ichimoku say that just one quick look at it was all that was needed to deter them from ever trying to use it.

Well, let’s go ahead and toss out a chart with the Ichimoku Cloud loaded on it, and then I’ll explain each of the cloud’s components for you. Here’s a four-hour chart of AUD/USD:


Let’s break things down—you’ll begin to see that the Ichimoku isn’t really that complicated after all.

1. The red line is the Tenkan Sen. This line is the leading indicator in Ichimoku, and it is almost always the first indicator of a change in trend direction. The Tenkan represents the sum of the highest high and lowest low, divided by 2, over the previous 9 time periods. (NOTE: With both the Tenkan Sen and Kijun Sen, the steeper their angles or slopes, the stronger the price movement or trend.) The Tenkan reveals one of the first important advantages of the Ichimoku over most traditional western charting indicators. Some might say that the Tenkan is essentially a 9-period moving average, but the Tenkan is more revealing than a 9 SMA (simple moving average). A 9 SMA will continue to show a steady trend, while the Tenkan will indicate when the price is flattening out. I’ve indicated an instance of the more accurate trend indication of Tenkan—marked by three red, down arrows in the center of the 15-minute chart below. You can see how the slope of the 9 SMA doesn’t change at all there, but the Tenkan shows a flattening out that is more accurately reflective of the market’s actual price action.

2. The blue line is the Kijun Sen. This line is the lagging, or more slow-moving, indicator, as compared to the Tenkan Sen. It’s calculated as the highest high and lowest low over the last 26 time periods, divided by 2. The Kijun indicates initial or medium-term support/resistance, and in Ichimoku trading it is often used as the level for a trailing stop. Some prefer to think of the Tenkan Sen as a “trigger” or “signal” line, and the Kijun Sen as the “base” or “stop” line. When a market is trendless, the Kijun will often indicate the equilibrium price point at the level where price flattens; but once the market begins to establish a trend, the Kijun will begin to angle up or down accordingly. Like the Tenkan, the steepness of the Kijun’s angle or slope indicates market strength and momentum. As an indicator of market equilibrium or balance, the Kijun line will also often indicate a level that the price will be drawn to return to—much like with major moving average (MA) levels (like the 10 MA or 50 MA), or pivot or Fibonacci levels—and can thus be used for things like market re-entry or the adding of additional positions.

3. The Ichimoku Cloud (the shaded areas on the chart) is the space created between the two lines known as Senkou Span A (the sum of the Tenkan and Kijun, divided by 2, plotted 26 time periods ahead) and Senkou Span B (highest high and lowest low over the previous 52 time periods, divided by 2, and pushed 26 time periods forward). The pushing forward of these two indicators is what leads to the formation of the Cloud that extends well beyond the current price candle, as an indicator of future price. Senkou Span B is also considered a long-term level of support or resistance. (Note, in the first chart above, how a thicker Cloud forms as the downtrend continues, thus indicating that the market would need to overcome sizeable resistance in order to successfully change the trend to the upside).

The Cloud is meant to show levels of long-term support or resistance, and here again we see one of the advantages of Ichimoku: rather than focusing on just a very specific price point, the Cloud indicates a broader area of support or resistance

This provides a more reliable indicator of either support/resistance, or of a breakout. As a market moves up and down, you will often see cases where a specific price point—for example, a 10 MA—is violated or crossed over, but where the total area encompassed by the Cloud is not. In practical trading terms, a price moving through a pinpoint moving average level might falsely indicate a reversal or breakout, while the Ichimoku Cloud would tell a trader that the market has not yet clearly chosen a direction or trend. The thicker-than-just-one-thin-line Cloud allows for taking into account market volatility, and in fact, that’s one of the purposes of the Cloud, to serve as a market volatility indicator—thicker clouds indicate higher volatility.

4. The green line is the Chinkou Span. A very different sort of indicator (you’ll notice it never extends all the way to the right-hand end of the chart), the Chinkou is the close of the current candle plotted 26 periods back on the chart. This is a very unique, and very reliable, indicator of market strength and momentum. Ideally, to indicate maximum trend strength, the Chinkou Span should be well away from price, sort of out on its own, without any price activity right around it. You can see that it is in the chart reproduced just below—the strong downtrend is indicated by the Chinkou being (A) below current price, and (B) set off away from price activity that lines up with it (by drawing a vertical line through the end point of the Chinkou to the price level the market was trading at that time, 26 periods earlier).

Besides indicating market strength, Chinkou is also very helpful as an indicator, along with the Cloud, of support/resistance levels. Chinkou highs or lows often coincide with major Fibonacci levels. Several peaks of the Chinkou at roughly the same level (as you can see are occurring on the left-hand side of this chart) mark that price level as a significant area of support/resistance (in this case, resistance, and sure enough, attempts to move higher than the highest Chinkou level failed, followed by the market turning decidedly to the downside).

In an uptrend, the Chinkou should rise and stay above price level, and in a downtrend, as illustrated above, it should ride well below price.

One of the helpful things the Chinkou does is simply draw our attention to where the price is now as compared to where it was 26 time periods previously. Just noting this difference will often provide a pretty clear indicator of the nature of the market’s action (up, down, or sideways/trendless).

Bottom Line

The Ichimoku Cloud is composed of several different indicators, each with a specific use and purpose in trading. Becoming familiar with these indicators is not really that difficult, and the Ichimoku Cloud can provide you with the basis for a very profitable, sound, low-risk trading strategy.

Summary:

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The leading indicator in Ichimoku is the Tenkan Sen, the sum of the highest high and lowest low, divided by 2, over the previous 9 time periods.

 

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The second indicator is the Kijun Sen, which is calculated as the highest high and lowest low over the last 26 time periods, divided by 2.

 

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The Cloud itself is formed by the space that exists between the two lines—the two lines known as Senkou Span A (the sum of the Tenkan and Kijun, divided by 2, plotted 26 time periods ahead) and Senkou Span B (highest high and lowest low over the previous 52 time periods, divided by 2, and pushed 26 time periods forward)

 

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The final and very important indicator in Ichimoku is the Chinkou Span, the close of the current candle plotted 26 periods back on the chart. This is a very unique, and very reliable, indicator of market strength and momentum.

 

All right, this is the end of Part One. In Part Two I’ll show you exactly how to trade using the Ichimoku Cloud! In the meantime, feel free to comment or ask questions below. Register with us to make sure you don’t miss any updates on services (we’ll be adding several new ones for you in the coming months).

 

Also, check out my “Daily Profit Forex Trading Strategy” while you’re on the site (it ONLY wins every time you use it) and have a wonderful, profitable day. Wishing you success in trading and in life, always.

 

This trading strategy is solely meant for educational purposes. If you decide to apply what you have learned, you do so at your own risk. Trading on margin carries high risk. Your capital may be at risk.

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writer bio

JACK MAVERICK

Jack Maverick has over 20 years of experience in futures and forex trading, first as a broker and then as an independent trader.  He enjoys sharing the trading wisdom and knowledge he has gained from his own trading experience and from other successful traders.

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Comments

 Jack Maverick
# Jack Maverick
Wednesday, October 29, 2014 12:09 PM
I'll tell you, kids, the more I look at the Ichimoku Cloud, the more I like it as something to trade off of. I gently suggest you give it serious consideration as a trading tool. - Jack Maverick
 Mobileguru
# Mobileguru
Friday, December 5, 2014 8:55 AM
Hi Jack,

As a fairly new trader to seen, finding your site and strategies was a very welcoming site. I agree after using the Ichimoku Cloud, it has already improved my strategy a good deal.

I am a Binary Options trader and using this indicator on 60 and 300 second trades on 60 second chart has proven to be quite successful. I am curious if you have any wisdom to add regarding the Ichimoku Cloud strategy and Binary Options trading rather than forex trading.

I also signed up for your simple strategy and wonder now if i can even apply it to binary options trading??

Thanks for the great training with the Ichimoku Cloud indicator. I couldn't agree more that traders should give this serious consideration as it really is a powerful indicator.

Stefan
 Jack Maverick
# Jack Maverick
Monday, December 8, 2014 10:56 PM
Stefan - Thanks for your comment. Unfortunately, I can't really add any specific information regarding binary options, as I don't personally trade them. Let me know if you have any other questions - Jack

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