The Ichimoku Cloud, or Ichimoku Kinko Hyo, can be translated to “one glance equilibrium chart.” Ichimoku Cloud was developed by journalist Goichi Hosoda in the 1930s. This indicator aimed to simplify market analysis and provide traders with a complete view of balance and momentum at a glance.
Ichimoku Cloud indicator functions as a layered moving average system that reflects both the market’s current condition and its potential trajectory. This makes it highly effective for momentum trading, especially when confirming the strength of a movement before entering a position.
For those new to Ichimoku, understanding its connection to moving average indicators offers a useful foundation for grasping its overall structure.
The Ichimoku system consists of five lines, each serving a distinct analytical purpose. Together, they illustrate trend direction, momentum, and support/resistance within these charts. Here are how it work:
- Tenkan-sen and Kijun-sen measure short-term and medium-term momentum.
- Senkou Span A and Senkou Span B form the “Kumo” or cloud, which visualizes projected support and resistance.
- Chikou Span lags behind price and confirms whether the prevailing trend remains valid.
When price moves decisively above or below the cloud, it often signifies a potential trend reversal, similar to patterns observed in a reversal trading strategy. The cloud’s gradient and formation resemble Fibonacci retracement levels, as both reveal areas where price may react.
How to Read the Ichimoku Cloud
Understanding Ichimoku Cloud becomes intuitive once the trader determines price position relative to the cloud:
- Above the cloud: Bullish trend
- Below the cloud: Bearish trend
- Inside the cloud: Neutral or consolidating market
- Next, evaluate crossovers between the Tenkan and Kijun lines and observe cloud twists when the cloud’s color changes.
Read more: What Is the Ichimoku Cloud Indicator and How to Use It?
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