The Ichimoku indicator is a technical indicator that shows support and resistance levels, movement, and trend direction. The Ichimoku indicator takes multiple averages and plots them on a chart. It also uses these figures to calculate Cloud, predicting price support or resistance at a particular point. The Ichimoku indicator was developed by Japanese journalist Goichi Hosoda and released in the late 1960s.
This indicator provides more data points than a standard candlestick chart. While it may seem complicated at first glance, traders familiar with interpreting graphs often find it easy to understand with defined trading signals.
What does Ichimoku mean?
In Japanese, “Ichimoku” translates to “one look,” which means that support and resistance levels can be measured with just one look. Key points about the Ichimoku indicator The Ichimoku indicator consists of five calculation lines; two of them form a cloud.
These lines include the 9-day moving average, the 26-day moving average, the average of these two moving averages, the 52-day moving average, and the retracement price line. Cloud is a marker in this indicator. When the price is below Cloud, the trend is down. When the price is above Cloud, the direction will be upward.
Uptrend signals are amplified if Cloud moves in the same direction as the price. For example, Cloud is moving up during an uptrend or during a downtrend, Cloud is moving down.
What information does the Ichimoku indicator give you?
The Ichimoku indicator shows relevant information at a glance using averages.
Traders often use the Ichimoku Cloud as an area of support and resistance, depending on the relative price. This is because the Cloud shows support and resistance levels that can be predicted in the future. This distinguishes Ichimoku Cloud from other technical indicators that only provide support and resistance levels for the current date and time. Traders should use the Ichimoku Cloud along with other indicators in technical analysis to maximize their risk-adjusted returns. For example, this indicator is often used with the Relative Strength Index (RSI), which can be suitable for confirming movement in a particular direction. It’s also important to look at more significant trends to see how smaller trends affect them. For example, during a powerful downtrend, the price may temporarily push to the Cloud or slightly above it before falling again. However, focusing only on this indicator means missing the bigger picture that price is under long-term selling pressure.
Crossovers are another way to use the Ichimoku indicator for better results. Watch for the conversion line to move above the baseline, especially when the price is above the Cloud space. This can be considered a powerful buy signal. One option is to hold the trade until the conversion line returns below the baseline. Any of the other lines can also be used as exit points.
The difference between the Ichimoku indicator and the moving average
While Ichimoku Cloud uses moving averages, they differ from regular moving averages. Simple moving averages take closing prices, add them up, and divide the total by the number of closing prices. For example, in the 10-day moving average, the closing prices of the last ten days are added, then divided by 10 to get the desired norm. Note that the calculations for Cloud Ichimoku are different. The averages in the Ichimoku indicator are calculated based on the high and low in a period and then divided by two. Therefore, Ichimoku averages will differ from regular moving averages, even if the same number of periods is used.
As you probably know, you can never say that one indicator is better than another. However, technical indicators provide information differently, and using them together can give traders and investors the information the Ichimoku indicator provides.
The Ichimoku indicator shows relevant information at a glance using averages.
Traders often use the Ichimoku Cloud as an area of support and resistance, depending on the relative price. As a result, the Cloud shows future support and resistance levels that can be predicted. This distinguishes Ichimoku Cloud from other technical indicators that only provide support and resistance levels for the current date and time. Traders should use the Ichimoku Cloud along with other indicators in technical analysis to maximize their risk-adjusted returns. For example, this indicator is often used with the Relative Strength Index (RSI), which can be suitable for confirming movement in a particular direction. It’s also important to look at more significant trends to see how smaller trends affect them. For example, during a solid downtrend, the price may temporarily push to the Cloud or slightly above it before falling again. However, focusing only on this indicator means missing the bigger picture that price is under long-term selling pressure.
Crossovers are another way to use the Ichimoku indicator for better results. Watch for the conversion line to move above the baseline, especially when the price is above the Cloud space. This can be considered a powerful buy signal. One option is to hold the trade until the conversion line returns below the baseline. Any of the other lines can also be used as exit points.
The difference between the Ichimoku indicator and the moving average
While Ichimoku Cloud uses moving averages, they differ from regular moving averages. Simple moving averages take closing prices, add them up, and divide the total by the number of closing prices. For example, in the 10-day moving average, the closing prices of the last ten days are added, then divided by 10 to get the desired norm. Note that the calculations for Cloud Ichimoku are different. The averages in the Ichimoku indicator are calculated based on the high and low in a period and then divided by two. Therefore, Ichimoku averages will differ from regular moving averages, even if the same number of periods is used.
As you probably know, you can never say that one indicator is better than another. However, technical indicators provide information differently, and using them together can give traders and investors the proper signal.
Limitations of using the Ichimoku indicator
One of the limitations of the Ichimoku indicator is its many lines, which may confuse traders in the price analysis process. Most graphing software allows you to hide certain lines to solve this problem. For example, all lines can be hidden, except for Leading Span A and Leading Span B, which create the Cloud. Every trader should focus on which lines provide the most information and hide the distracting lines that will not help in the correct interpretation of the chart.
Another limitation of the Ichimoku indicator is that it performs the relevant calculations based on historical data. As a result, nothing in the Ichimoku indicator formula is inherently predictive, which is a significant limitation for professional traders.
Also, the Ichimoku Cloud indicator can give the trader incorrect or incomplete information for a long time because the price remains too high or too low. At times like this, the conversion line, baseline, and their crossovers become more critical because they are usually closer to price and contain more accurate information.
The meaning of some concepts in the Ichimoku indicator
What are Tenkan Sen and Kijun Sen?
The Japanese terms for the moving average lines used in the Ichimoku indicator are called Tenkan and Kijun Sen.
Kijun-sen also means “baseline” and is the mid-point of the 26-period high and low. Kijun-sen is typically used in conjunction with Tenkan-sen (conversion line)—the 9-period midpoint price—to generate trade signals when they cross.
What are Senkou openings in the Ichimoku indicator?
Senkou openings from the Cloud area of the Ichimoku indicator:
• Senkou Span A plots the average of the Tenkan Sen and Kijun Sen 26 days before the current price.
• Senkou Span B plans the standard of the highest high and the lowest low of the past 52 days and then the previous 26 days.
What is the Chikou opening in the Ichimoku indicator?
Chikou Span measures market sentiment by using the last close price and plotting the previous 26 days of price.
Trading strategies using the Ichimoku indicator
Now that you know about the Ichimoku indicator, its uses, and limitations, let’s discuss some bullish and bearish strategies using this indicator.
Bullish trading strategy:
To determine whether prices are in an uptrend or not, the Ichimoku indicator criteria can provide signals to the trader:
Uptrend criteria
• Prices should be above Tenken and Tenken above Kijun Sen.
• Both Tenken and Kijun Sen should move higher with prices.
• Kijun Sen should not be too far from the price.
• Cuomo of the future should be bullish
• Prices should be higher than Como.
Bearish trading strategy
To determine if prices are in a bearish trend, the Ichimoku indicator criteria are as follows
Downtrend criteria
• Prices should be lower than Tenken, and Tenkun should be lower than Kijun Sen.
• Both Tenken and Kijun Sen should move lower along with prices.
• Kijun Sen should not be too far from the price.
• The future Kumo should be bearish.
• Prices should be lower than Como.
Final word
To create a Cloud to show where prices may find future resistance or support, the Ichimoku Cloud plots several moving averages on the chart. It will show not only support and resistance but also the direction and movement of the trend, all of which appear as a group of technical indicators. Although there are limitations to the Ichimoku indicator, it cannot be said to perform better or worse than existing technical indicators such as moving averages. This indicator only shows information differently.
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