What is the 'Ichimoku Cloud'

The Ichimoku Cloud is a chart used in technical analysis that shows support and resistance, and momentum and trend directions for a security or investment. It is designed to provide relevant information at a glance using moving averages (tenkan-sen and kijun-sen) to show bullish and bearish crossover points. The "clouds" (kumo, in Japanese) are formed between spans of the average of the tenkan-sen and kijun-sen plotted six months ahead (senkou span B), and of the midpoint of the 52-week high and low (senkou span B) plotted six months ahead.

BREAKING DOWN 'Ichimoku Cloud'

The Ichimoku cloud was developed by Goichi Hosoda, a Japanese journalist, and published in the late 1960s. It provides more data points than the standard candlestick chart. While it seems complicated at first glance, those that are familiar with how to read the charts often find it easy to understand with well-defined trading signals.

Here's an example of an Ichimoku Cloud generated on StockCharts.com:

Example of an Ichimoku Cloud chart.

There are five calculations used to generate the Ichimoku Cloud:

  1. Tenkan-sen = (9-day high + 9-day low) / 2
  2. Kijun-sen = (26-day high + 26-day low) / 2
  3. Senkou Span A = (Tenkan-sen + Kijun-sen) / 2
  4. Senkou Span B = (52-day high + 52-day low) / 2
  5. Chikou Span = Close plotted 26-days in the past.

Ichimoku Cloud Signals

The overall trend is up when prices are above the cloud, down when prices are below the cloud, and flat when they are in the cloud itself. When senkou span A is rising above senkou span B the trend is stronger upward, and is typically colored green. When senkou span B rises above senkou span A, the trend is stronger downward and is denoted with a red-colored cloud.

Traders will often use the Senkou "cloud" as an area of support and resistance depending on the relative location of the price. In the chart above, the Senkou "cloud" provides support levels that can be projected into the future. This sets the Ichimoku Cloud apart from many other technical indicators that only provide support and resistance levels for the current date and time.

Traders should use the Ichimoku Cloud in conjunction with other technical indicators to maximize their risk-adjusted returns over time. For example, the indicator is often paired with the Relative Strength Index (RSI), which can be used to confirm or disconfirm momentum in a certain direction. It's also important to look at the bigger trends to see how the smaller trends fit within them.

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