1.1. ichimoku trading
1.2. ichimoku signals
1.3. why ichimoku works
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. The advent of the cryptocurrencies market has developed a new area of application for the Ichimoku Cloud as 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.
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 familiar with how to read the charts often find it easy to understand with well-defined trading signals.
There are five calculations used to generate the Ichimoku Cloud:
- Tenkan-sen = (9-day high + 9-day low) / 2
- Kijun-sen = (26-day high + 26-day low) / 2
- Senkou Span A = (Tenkan-sen + Kijun-sen) / 2
- Senkou Span B = (52-day high + 52-day low) / 2
- Chikou Span = Close plotted 26-days in the past.
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 is also important to look at the bigger trends to see how the smaller trends fit within them.
Chartists use the actual cloud to identify the overall trend and establish a trading bias. Once a trading bias is established, chartists will wait for a correction when prices cross the Base Line (red line). An actual signal triggers when prices cross the Conversion Line (blue line) to signal an end to the correction.
This trading strategy will set three criteria for a bullish signal. First, the trading bias is bullish when prices are above the lowest line of the cloud. In other words, prices are either above the cloud or remain above cloud support. Second, price moves below the Base Line to signal a pullback and improve the risk-reward ratio for new long positions. Third, a bullish signal triggers when prices reverse and move above the Conversion Line.
Buy Signal Recap:
- Price is above the lowest line of the cloud (bullish bias)
- Price moves below the Base Line (pullback)
- Price Moves above the Conversion Line (upturn)
Sell Signal Recap:
- Price is below the highest line of the cloud (bearish bias)
- Price moves above the Base Line (bounce)
- Price moves below the Conversion Line (downturn)
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