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Technical Analysis, Studies, Indicators:

Ichimoku Clouds


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Description: technical analysis, price based technical indicators, moving averages, highs and lows, predicting market trends with technical indicators, Ichimoku Clouds.

The Ichimoku Cloud (also called Ichimoku Kinko Hyo) was developed by Goichi Hosada in 1969. This indicator has been used in technical analysis to define support and resistance levels, to reveal trend direction, to generate trading signals and to define the strength of signals. The full translation of "Ichimoku Kinko Hyo" (the old name for Ichimoku Clouds) could best be described as 'one glance balanced chart.' While, initially, this indicator might appear confusing and complicated on a chart, it is really quite straightforward and is often used to establish the trend and detect trend breakouts. As with most technical indicators, it performs better when it is used on the longer-term charts. Nevertheless, this indicator performs quite well during range bound markets.

The Ichimoku Clouds are constructed by five lines with colored areas between two of them, which are called Clouds. The Ichimoku lines are based on the average of High and Low values over a specified period (number of bars).

The five plots of Ichimoku Clouds consist of

  1. Tenkan Line (Conversion Line):
    1. (highest high + lowest low) / 2calculated over the last 9 periods (bars)
      where 9 is the default and most used conversion line bar period
  2. Kijun Line (Base Line):
    1. (highest high + lowest low)/2 calculated over the last 26 periods (bars)
      where 26 is the default and most used bar period (Slow Period)
  3. Chikou Span (Lagging Span):
    1. most current closing price plotted 26 time periods back
      where 26 is the same bar period as used in the Kijun Line (Base Line)
  4. Senkou Span A (Leading Span A):
    1. (Tenkan line + Kijun Line)/2 plotted 26 time periods ahead
      where 26 is the same bar period as used in the Kijun Line (Base Line)
  5. Senkou Span B (Leading Span B):
    1. (highest high + lowest low)/2 calculated over the past 52 time periods and plotted 26 periods ahead
      where 52 is the Leading Bar period and 26 is the same bar period as used in the Kijun Line (Base Line)

Chart 2: NASDAQ 100 Index (^NDX) - Ichimoku Cloud

Nasdaq 100 Ichimoku Cloud

The Cloud (Kumo) is formed by the Leading (Senkou) Span A (green line) and Leading (Senkou) Span B (red line) lines and is the most noticeable feature of the Ichimoku Cloud. Since the Leading Span A is based on shorter than Leading Span B bar period setting, Leading Span A moves faster than the Leading Span B. In technical analysis, Cloud is used to define the overall trend. Thus, if the price moves above a Cloud, the trend is considered bullish. When the price is below a Cloud, a trend is bearish and the trend is flat when the price is inside a Cloud. At the same time, the Clouds could be used to evaluate the strength of a trend. If a Cloud is green and the price is above the Cloud a bullish trend is considered strong and when Cloud is red while price is above Cloud a bullish trend is considered weak. Controversially, when price is below a red Cloud, bearish trend is considered as a strong trend and when price is below a green Cloud a bearish trend is considered to be weak.

While Clouds are used to define the current trend, the Conversion (Tenkan) and Base (Kijun) lines are used to generate signals. In the same way as with moving averages, a "Buy" signal is generated when Conversion Line moves up and crosses the Base Line. When the Conversion Line declines and crosses the Base Line, a "Sell" signal is generated.

Depending on the relation of the Clouds to the price when a signal is generated, a signal could be considered to be a strong signal, a medium signal or a weak signal. As an example, a "Buy" signal is considered as a strong signal when it is generated when the price rises above a green Cloud and a "Buy" signal is considered weak when it is generated when the price is below a Cloud. Overall, Ichimoku signals and Clouds can be summarized in the following table:

Table 1: Ichimoku Clouds and Signals generated on Conversion and Base Lines Crossovers

Price and Cloud
Relation
TrendType
of Cloud
Trend's
Strength
Conversion/Base
Signal
Signal's
Strength
Price is
above Cloud
BullishGreenStrongBuyStrong
SellWeak
RedWeakBuyMedium
SellWeak
Price is
below Cloud
BearishGreenWeakBuyWeak
SellMedium
RedStrongBuyWeak
SellStrong
 
Price is
inside Cloud
FlatGreenWeakBuyMedium
SellWeak
RedWeakBuyWeak
SellMedium

While Conversion/Base Lines crossovers are most often used to generate signals in Ichimoku Clouds, there are other strategies to generate signals based on the Ichimoku lines. Thus, signals could be generated on the crossovers of the price and Base Line, signals could be generated when Cloud changes its color (crossovers of Leadings Span A and Leading Span B) and as signals could be generated if the price breaks above or below a Cloud.

Chart 2: NASDAQ 100 Index (^NDX) - Ichimoku Clouds
Signals generated by Conversion and Base Lines du\ring Bullish trend

Nasdaq 100 Ichimoku Cloud Signals

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