How to use the Ichimoku Cloud

An increasing number of beginner traders wonder how to use the Ichimoku Cloud, drawn by the distinctive visuals and all-in-one nature of the technical indicator.

 

The comprehensive Ichimoku Kinko Hyo Cloud integrates several components and requires a nuanced understanding to interpret correctly.

 

Although it can be intimidating at first, understanding how the Ichimoku lines work together can help traders make trading decisions more easily and achieve greater consistency.

 

This article is here to help traders gain a nuanced understanding of how to use the Ichimoku Cloud to trade forex pairs and other markets.

 

Those with a burning desire to improve their trading strategies or quit juggling various indicators may consider the Ichimoku Cloud becoming a powerful technical trading tool in their arsenal.

 

By the end, aspiring Ichimoku traders should be able to add the indicator to their MT4 or TradingView price charts and identify potential trading opportunities more easily than before.

What is the Ichimoku indicator?

The Ichimoku Cloud is a powerful technical indicator originating from Japan that is used in forex trading and other financial markets.

 

Developed and refined over decades before its release, it is renowned for its ability to encapsulate at a single glance multiple aspects of market dynamics, such as trends and support and resistance, into a visually intuitive chart.

 

The Ichimoku Cloud translates to "one glance equilibrium chart" in Japanese.

 

The all-in-one indicator forms a distinctive 'Cloud' shape, also known as Kumo Cloud, formed by the Senkou Span A-B area. The Cloud trading system incorporates five moving average variants for a holistic view of the market:

 

• Conversion Line (Tenkan Sen)
• Base Line (Kijun Sen)
• Leading Span A (Senkou Span A)
• Lagging Span B (Senkou Span B)
• Lagging Span (Chikou Span)

 

The Ichimoku Cloud

 

As a dynamic indicator consisting of multiple parts, trading Ichimoku can help traders identify sell or buy signals for both short-term and long-term trades. While it is popular for its effectiveness in trending markets, it has earned its reputation as a reliable tool for novice and experienced traders alike in various market conditions.

History of the Ichimoku Kinko Hyo Cloud

The Ichimoku indicator was developed before World War II by Japanese journalist Goichi Hosoda. Dissatisfied with the limitations of traditional Japanese charts, Hosoda sought to create a trading system that could better help analyse market trends by incorporating multiple time frames and equilibrium points.

 

After spending nearly 30 years refining the Ichimoku Cloud strategy, he introduced the Ichimoku Kinko Hyo original book to the world in 1968. The book quickly gained popularity in Japan and became a standard tool in many trading rooms.

 

The Ichimoku kinko hyo system began to attract attention in the West in the 1990s, with key figures like Hidenobu Sasaki and David Linton helping to popularise it through books and teachings.

 

Following its incorporation into trading software and platforms like MT4 and TradingView, the Ichimoku Cloud indicator remains a cornerstone of technical analysis today, particularly in forex trading.

How does Ichimoku Cloud work?

The Ichimoku indicator works by combining multiple moving average variants into a single, easy-to-read chart. Rather than focusing on just one or two averages for crossovers, it uses five lines that provide information on momentum, equilibrium, and even projected support and resistance. This offers any trader a view of past, present, and potential future price action.

 

When these five lines are viewed together, they can reveal whether the price is in an uptrend or downtrend, where key support and resistance may lie, and even the balance of supply and demand.

 

The Ichimoku Cloud settings are known as 9 26 52 26, where the Tenkan Sen is 9 periods, the Kijun Sen is 26 periods, the Senkou Span A is 26 periods, the Senkou Span B is 52 periods, and the Chikou Span is 26 periods (seen in the below TradingView chart - top to bottom).

Ichimoku Cloud default settings, TradingView

 

Although originally derived from the Japanese trading calendar, the majority of Ichimoku strategies continue to utilise these settings to date because they have been rigorously tested over decades. Some traders may adjust them to suit different markets or trading styles. However, doing so may reduce the Ichimoku win rate due to widely accepted interpretations.

How to interpret Ichimoku Cloud

Designed to capture markets' equilibrium from three distinct time periods, the fast-acting line (the Tenkan-Sen) has a role in capturing near‐term momentum.

 

As the Ichimoku components work together, a slower, more stable line (the Kijun-Sen) outlines the medium-term trend and acts as a dynamic benchmark for support or resistance.

 

Two forward‐projected lines (Senkou Span A and Senkou Span B) form the Kumo Cloud, which forecasts future price movement and provides a picture of the trend’s duration.

 

Complementing these, a backwards-looking line (the Chikou Span) traces the current price into the past, providing retrospective confirmation of trend strength.

 

The table below summarises each component’s period, trend duration focus, and primary role.

 

Ichimoku Cloud explained

Tenkan-Sen: The Conversion Line

The Conversion Line, or Tenkan-Sen, is a short-term moving average that represents the midpoint of the highest high and lowest low over the past 9 periods to help identify short-term trends and potential reversal points. This construction gives it a dual role: it reacts quickly to short‐term price extremes while also identifying early signs of momentum shifts.

 

When the price is above the Tenkan-Sen, it indicates a potential bullish trend, while a cross below suggests a bearish trend. The steeper the angle, the stronger the momentum. On the other hand, a flat Tenkan-Sen indicates a trendless condition over the last 9 periods.

Kijun-Sen: The Base Line

The Base Line, or Kijun-Sen, is a longer-term moving average that provides a broader view of market trends as it is calculated by averaging the highest high and lowest low over the past 26 periods. It is more reliable for medium-term price equilibrium due to the longer time period than the Tenkan-Sen and can be used to confirm shorter-term trends identified by the shorter-term line.

 

When the price crosses above the Kijun-Sen, it indicates a potential bullish trend, while a cross below suggests a bearish trend. However, the price will often oscillate around the Kijun-Sen, with rebounds towards it underscoring its role as a gravitational “anchor.”

Senkou Span A: Leading Span A

Leading Span A, or Senkou Span A, is calculated by averaging the Kijun-Sen and Tenkan-Sen and plotting it 26 periods into the future. This forward shift represents potential future support and resistance levels ahead of current price action at a dynamic level, forming the upper cloud boundary of Kumo.

 

Senkou Span A is useful for identifying areas where the trend may continue or a potential trend reversal may occur. When the price is above the Senkou Span A line, it implies a bullish trend, while a price below indicates a bearish trend. When it is combined with Senkou Span B, it helps reveal a forward-looking equilibrium.

Senkou Span B: Leading Span B

Leading Span B, or Senkou Span B, is calculated using the average of the highest high and lowest low of the past 52 periods and producing the line 26 periods into the future. Because it reflects a much longer historical range, Senkou Span B tends to move more slowly. This Ichimoku component provides a broader view of near-term market extremes at a dynamic level, forming the lower Cloud border.

 

Span B is useful for identifying areas where the trend may continue or reverse. When the price is above Leading Span B, it indicates a bullish trend, while a price below suggests a bearish trend.

Chikou Span: The Lagging Span

The Lagging Span, or Chikou Span, represents the current price at the bar close plotted 26 periods behind, effectively offering a confirmation of current market sentiment. This line helps confirm price action, potential bearish and bullish trend reversal points and trend direction and strength.

 

The Chikou Span is a unique component of the Ichimoku Cloud, providing a historical perspective on the current price action and allowing traders to see whether current price moves are in line with the longer-term trend. It sits at the left, backwards-looking side of the Ichimoku Kinko Hyo chart.

 

When the Chikou Span rests above the past price action, it reinforces bullish momentum, while a lag below historical prices confirms bearish conditions.

Kumo Cloud

The Ichimoku Kumo Cloud is the area between Senkou Span A and B. It provides a multidimensional view of dynamic support and resistance levels and helps identify trend direction.

 

In a generic interpretation, when the price is above the Kumo Cloud, it indicates a bullish trend, while a price below suggests a bearish trend. However, when the two leading spans change their relative positions (one crosses the other), it signals potential shifts in market sentiment and trend reversals. This event is known as the Kumo Twist.

 

The thickness of the cloud and even its colour (often changed automatically based on which Span is on top, from green cloud to red cloud and vice versa) can help measure the strength of the reverting or prevailing trend.

 

For context, after a Kumo Twist, the Cloud is usually thin because it is in the early stages of forming a new dynamic support and resistance region. This suggests a weak or consolidating trend that may still be predisposed to reversals or breakouts. On the other hand, a thick, or thickening, ongoing Kumo tends to act as a strong activation barrier, making cloud breakouts more difficult.

 

Ichimoku Cloud bullish trend and bearish trend

 

Ichimoku Cloud trading signals

The Ichimoku Cloud is a technical tool that provides several trading signals derived from its several components, as explained above. Each plays a part in generating potential buy or sell signals.

 

How to use the Ichimoku indicator for advanced traders

The primary uses of the Ichimoku components are to provide a snapshot of how strong a trend is and to flag potential reversals through its multi‐component interplay. However, since the entire system depends on how price moves, affecting each line, advanced Ichimoku traders can use the trading indicator in other ways to gain additional insights.

Identifying false signals with Ichimoku

While the Ichimoku Cloud is a powerful tool, it can also generate false signals. To identify false signals, traders may look for:

 

• Momentum: A valid bullish signal typically shows a price close well above the Kumo Cloud and a bearish signal well below it. The bullish signal may be false if the Ichimoku setup is upward, but the price flatlines near the cloud.
• Precedence: A strong trend usually sees the fast Tenkan‐Sen above the slower Kijun‐Sen for bullish markets or the opposite for bearish. A simple yet effective Chikou Span strategy is to confirm the trend sits on the “correct” side of historical price action.
• Consistency: A valid trading signal on a shorter timeframe (e.g., a 1‑hour chart) should be supported by the overall direction seen on a higher timeframe (e.g., a 4-hour or daily chart). Discrepancies suggest a short‐term fluctuation, not a new trend.

 

False signals are a common challenge in trading Ichimoku, and using complementary technical analysis tools can help traders distinguish between genuine trading signals and market noise. After all, a truly valid signal is accompanied by harmony among its components and others'.

Trading Ichimoku Cloud with other indicators

Incorporating indicators like RSI, MACD, and Bollinger Bands in an Ichimoku Cloud trading strategy can help improve accuracy and reliability. Trading the Ichimoku Cloud with other indicators can provide additional layers of confirmation and may improve overall trading performance.

 

Below are three popular combinations for Ichimoku Cloud trading.

How to use the Ichimoku Cloud with RSI

The Ichimoku RSI strategy can help confirm the strength of trends indicated when trading the Ichimoku Cloud. When the price is trading well above the Cloud, and key Ichimoku lines Tenkan Sen and Kijun Sen are supportive, an RSI cross above the 50 key level signals a stronger indication of entering a long position.

 

Ichimoku Cloud with RSI

 

How to use Ichimoku Cloud and MACD

The Ichimoku and MACD strategy can help confirm the continuation of trends and potential reversal points when the MACD starts to diverge from the Ichimoku signals. Pairing Ichimoku with the MACD reinforces a bullish trend when the MACD line crosses above its signal line at or just before a confirmed bullish Ichimoku setup.

How does Ichimoku Cloud work with Bollinger Bands

The Ichimoku Bollinger Bands strategy can be used to gauge market volatility and identify potential breakouts when the price is above the Cloud or below. For example, when the price breaks above the upper Bollinger Band while trading above the Cloud, it indicates a breakout less likely to fail. However, incorporating the Bands onto the same chart could clutter the trader's view, with many traders choosing separate sub-charts.

Determining entry and exit points with Ichimoku Cloud

The Ichimoku Cloud can help determine optimal entry and exit points for both crossover and breakout signals. Breakout entries are particularly powerful when a period of consolidation ends, often signalled by a wider Kumo Cloud.

How to use the Ichimoku Cloud for entries

For bullish trades, one of the Ichimoku strategies is to enter a long position when the price crosses above the Tenkan Kijun lines, ideally in conjunction with a bullish crossover and a breakout above the Cloud.

 

For bearish trades, a sell signal is reinforced when the price falls below both lines. The Tenkan-Sen crosses below the Kijun-Sen line, and the price is below the Cloud.

 

The Tenkan Sen Kijun Sen strategy is the easiest and most popular to comprehend, mirroring moving average crossovers.

Ichimoku Strategy for exiting positions

For exits, the Cloud acts as a dynamic support or resistance depending on the direction of the trade.

 

In a long position, if the price starts to pull back towards the lower edge of the cloud or a bearish crossover occurs, it may signal a weakness in price momentum, prompting an exit.

 

Similarly, in a short position, as the price approaches the upper boundary of the Cloud or a bullish crossover develops, calls for an exit.

Managing Cloud trading risk with Ichimoku

Trading Ichimoku Kinko Hyo Cloud requires managing risk, and many Ichimoku strategies are used to help calibrate stop-losses and profit-take targets.

 

For example, a stop-loss for a bullish trade could be placed below the lower boundary of the Cloud, while a take-profit would be set at the Senkou Span A or B, assuming these lines have historically acted as a level of resistance.

 

Many Ichimoku strategies involve the Cloud. A thick cloud plays a key role here as a well-established support or resistance area is less likely to be penetrated, providing traders with more confidence to remain in the market. Conversely, a thin cloud suggests weakness, calling for more conservative positioning, a tighter stop-loss and a shorter profit-take target. Given the reduced risk-reward ratio, narrow clouds are best left without a trade unless using a consolidation trading strategy.

 

To refine risk management, one can also use an average crossover strategy of Ichimoku lines as confirmation signals. For example, a bullish Tenkan-Sen and Kijun-Sen crossover when prices are well above a thick Kumo Cloud supports a strong uptrend and may justify moving the protective stop-loss closer to the entry to secure a profit. On the other hand, a crossover when the two cloud boundaries are thin may signal a faltering trend, suggesting tighter risk parameters and an early exit.

How to use Ichimoku Cloud for day trading with volumes

Day trading with the Ichimoku Cloud involves identifying short-term trends and potential entry and exit points within a single trading day to capture intraday volatility.

 

By combining volume and Ichimoku Cloud analysis, day traders can leverage the Ichimoku Cloud for trend identification and potential breakout zones, as volume confirms the strength and validity of the Ichimoku signals.

 

Here's a step-by-step example of a day trading breakout strategy based on the Ichimoku and volumes on the 1H chart:

 

• Analyse the main trend: Start by analysing the overall trend on the 4-hour and daily charts. The Ichimoku indicates a trend above or below the Cloud while increasing volumes support it. All timeframes must point in the same direction.
• Identify the 1-hour trend: Look for the price to be above the Kumo Cloud and the Tenkan-Sen line to be above the Kijun-Sen for a bullish trend or below the Cloud for a bearish trend.
• Confirm the 1-hour trend: Ensure the Chikou Span is above the Cloud for additional confirmation of bullish momentum or below the price for a bearish trend.
• Confirm breakout with volume: Look for significant volume spikes during price breakouts above or below the Kumo Cloud to validate the signal. Price closes above or below the Cloud with high volumes indicate a strong up- or downward trend.
• Consider a position: Consider entering a long position when the price crosses above the Cloud with high volume. The Tenkan-Sen is also above the Kijun-Sen line, and the Chikou Span is above the Cloud. The opposite setup is valid for shorts in a bearish breakout scenario.
• Set stop-loss and take-profit: Consider placing a stop-loss below the Kumo Cloud and a take-profit when prices revert below or above the Kijun-Sen or within the Cloud. Fully exit the trade if the price crosses Kumo in the opposite direction or if volume starts to decline and then increases in the opposite direction. Trades also combine Ichimoku with Fibonacci to evaluate take-profit levels.

 

 

Ichimoku and volumes day trading strategy

 

Ichimoku tips

Ichimoku isn’t just a set of lines; it’s a complete set or Ichimoku components featuring an integrated equilibrium chart that offers a clear view of trend, support and resistance “at a glance.” Learning is all about understanding the bigger picture.

 

Here are some tips and tricks to understanding the Ichimoku:

 

• Familiarise with its five lines at the time-tested standard 9 26 52 settings
• Pay attention to how the price relates to the Kumo cloud; does it confirm or invalidate the prevailing trend?
• Anticipate Tenkan-Singou crossovers as they can indicate early entries or warning signs, especially when confirmed by the position of the Chikou Span.
• Observe the cloud’s thickness; thinner clouds suggest impending breakouts.
• Embrace multiple time frame analyses, back-testing and other indicators for improved cloud trading strategies.

 

In short, keep it simple, practice regularly, and let the visual clarity of Ichimoku guide you to informed trading decisions.

Conclusion

The Ichimoku Cloud is a comprehensive indicator and technical analysis tool that provides valuable insights into market trends, support and resistance levels, and potential entry and exit points. By understanding how to use the Ichimoku Cloud components or how to combine them effectively, traders can make more informed decisions and optimise their trading strategies. The Ichimoku Cloud is a technical analysis indicator valuable to the trading arsenal of both a beginner and intermediate trader.