This overview will be dedicated to the most unusual and even exotic indicator—the Ichimoku cloud. After accidentally adding it to the chart, many beginners are surprised at the complexity of the interface and try to avoid it in the future. In comparison with the MACD, RSI, or Moving Average, this instrument is really noticeably more complicated, but at the same time it is significantly more functional. This article will provide a simple overview of a complex indicator.
The Ichimoku cloud was actually a lifelong goal for its developer. He spent more than a dozen years on its development, trying to bring his brainchild to perfection. The instrument was created by a Japanese man at the beginning of the last century, whose real name is Goichi Hosoda. Ichimoku is only the printed pseudonym under which he gained worldwide fame among traders.
The indicator was presented to the general public only in 1968, after more than 30 years of developing it. Analysts on the Japanese stock exchange began to actively use the new tool. Currently, the Ichimoku Cloud is a popular indicator that is often used not only by professional financial analysts, but also by amateur traders who trade on online platforms.
Ichimoku interface and functionality
Goichi Hosoda developed and presented his development as a complete system for technical market analysis. It includes 6 elements, which is very rare. Ichimoku consists of trend indicators and oscillators, which allows you to evaluate a different-scale assessment of the market situation.
Descriptions of the elements:
- Tenkan — moving average in red, calculated using the simple averaging formula;
- Kijun — the second main line, the blue moving average, which is paired with Tenkan;
- Chikou — a secondary element in the form of a line with an offset, which completely repeats the price movement on the chart;
- Senkou A — the border of the “cloud,” colored green, its calculation formula shows the arithmetical mean position of the main curves (Tenkan and Kijun);
- Senkou B — the other border of the “cloud” in red with a similar calculation formula, but with an offset and other minor adjustments added.
The sixth element is the “cloud” that fills the space between the Senkou A and B curves. Depending on the current position of those curves and the market situation, it can have a red or green fill, which symbolizes an upward or downward price trend on the chart.
Trading on the signals
Simple indicators like RSI or Parabolic SAR have an unambiguous signal interpretation scheme. In the case of Ichimoku, things are much more complicated, which is not surprising given its 6-element interface. While reviewing this tool, we will look at 4 key signal trading strategies.
- Moving Average convergence. The main signal of the indicator is the intersection point of Kijun and Tenkan, the red and green lines. The type of trade (up or down) depends on which of the lines ends up on top. If it’s red, the trade is “down;” if it’s green, it’s “up,” accordingly.
- Cloud trend reversal. A similar scheme, but the convergence and divergence of the Senkou A/B curves are taken into account. At the same time, the fill color of the “cloud” changes. If the trend is up, it will be green; if it’s down, it’s red. Color interpretation is standard.
- Price divergence. The position of the price bars relative to all the indicator lines is evaluated. In some cases, the candles are positioned higher or lower, but most of the time they are approximately in the middle. A similar situation is formed against the background of intense directional trends.
- Working in advance. A breakout of the Chikou line by the candles, which will indicate an intense price jump that goes beyond the “normal” range of averaged values.
In fact, there are significantly more strategies. A number of factors are taken into account—the sequence of plotting all 6 elements and price formations on the chart. There are many different approaches and dozens of different strategies. Enthusiasts in trading communities continue to offer different solutions with varying degrees of effectiveness.
We want to point out that on the Binomo trading platform, you can trade on the demo account without funding your real account or any financial risk to your balance. This opens up opportunities for the most daring experiments. You can independently test various approaches to the interpretation of Ichimoku signals and evaluate their effectiveness based on your trading results. Effective strategies can later be applied when trading on your real account.
Caution! This article is not intended to be investment advice. No strategy can guarantee 100% correct trading results. A successful trading result in the past is not a guarantee that it will be repeated in the future. Any information contained in this article is for informational purposes only.