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Do you want to profit from cryptocurrency trading? The technical analysis tool the Ichimoku Cloud will help you to do it.
To gain a profit from trading, it is necessary to use the tools of technical analysis. There are a variety of such tools that would help you understand trading. Another indicator meant to help understand the trading market and make a profit is known as Ichimoku Cloud.
What is the Ichimoku Cloud. History
The Ichimoku Cloud is a technical analytics method composed of several metrics. It is used to anticipate and identify entry and exit points and future trends.
The idea for the Cloud belongs to Goichi Hosoda in the late 1930s and he published it in the late 1960s. This financial analyst has been writing articles for a long time, which were published under the pseudonym Sanjina Ichimoku which means “what a man sees in the mountains”. Later, Goichi devoted himself entirely to the development of the presented indicator and has been improving it for many years. It has integrated three other theories into the Ichimoku technique and they improve and enhance the indicator. These theories are Time Theory, Wave Movement Theory, and Target Price Theory.
How does the Ichimoku cloud work?
Ichimoku is an indicator represented by a combination of five rows, three of these lines are mobile averages, and two are their derivatives:
- Kijun-sen is the principal line that shows the presence and carrier of long-term trends. Kijun is usually marked with a red line;
- Tenkan-sen is an inverted line that indicates the presence and direction of a short-term tendency. It is a purple line;
- Chinkou Span – a linear graph based on closing prices and then lagged by a certain number of periods. It allows you to compare the current closing price. It is generally indicated in brown;
- Senkou Span A is the headline, which is the primary frontier of what is called “cloud” or Kumo. Sengoku Span A is usually represented in blue;
- The second line is formed by Senkou Span B, drawn as a green line.
The Ichimoku cloud is used to identify market trends and pulses. Initially, this tool seems very complex, it does not come from a subjective human contribution, like other methods of technical analysis, but its strategy is quite simple.
How to use the Ichimoku Cloud
The distance between the Senkou lines is plotted on the chart and is called the Ichimoku cloud. If the price is between these lines, the market is considered as non-trend and the cloud edges then form a support level and a resistance level. If the price is above the “Ichimoku” cloud, then its upper line forms the first support level, and the second one – the second support level. If the price is below an Ichimoku cloud, then the lower line forms the first resistance level, and the upper line forms the second resistance level. If the Chinkou Span line crosses the price chart from bottom to top, it is a signal to buy. If the line crosses the price chart from the top downwards – it is a signal to sell. Kijun-sen is considered to be the mainline and is used as the market movement indicator. If the price is above this line, prices are likely to continue to rise. When price crosses this line, further trend changes are likely. Another way of using Kijun-sen is by giving signals. A buy signal is generated when the line Tenkan-sen crosses Kijun-sen from below to above. Downwards is a sell signal. Tenkan-sen is considered a reversal line and is used as an indicator of market trend. If this line rises or falls, a trend exists. When it goes horizontally – the market has entered the channel.
As with any other indicator, it should be used together with others to confirm trends and reduce risks. The amount of information it displays can be overwhelming to most novice traders because it is a more complicated indicator. In this regard, it is recommended that you first master the simplest tools before you start using the Ichimoku cloud.
Formula for Ichimoku Cloud
Conversion line (tenkan sen) = 9-PH+9-PL/2
Base Line (Kijun sen) = 26-PH+26-PL/2
Leading Span A (sekou span A) = CL+Base Line/2
Leading Span B (senkou span B) = 52-PH+52-PL/2
Lagging Span (chikou span) = Close plotted 26 periods in the past
PH = Period High
PL = Period Low
CL = Conversion Line
Advantages of Ichimoku Cloud
The Ichimoku indicator is one of the most sophisticated indicators on trading platforms. Its advantage is that it is free. Despite the complexity of signal analysis, any trader can figure out how to work with the indicator.
The Ichimoku cloud is not just an indicator, it is a real trading technique. It is quite popular and has long proven its effectiveness. The only caveat is that this strategy is dependent on the level of market volatility, so the latter should always be monitored. If you do not do this, trading signals will be inaccurate.
In general, the Ichimoku indicator is a sort of long-term business strategy. Here, special attention is paid not to single signals, but their combination. The use of strategy elements allows for long-term analysis for 3 months or several quarters. The values of the lines set in the indicator are universal for all types of trading periods, which are used by traders to group quotes on various exchanges, incl. when trading BTC-USD pairs.
How to use it
Trading using Ichimoku Cloud requires that you be on a trading platform. The good news is that these platforms offer demos where you can practice trading before diving into proper trading. Bit4you is one such platform that offers not only demos but proper trading platforms. With the Ichimoku cloud, the user is free to either use the indicator or calculate manually, which of course will take much time. According to the Ichimoku Cloud, when the Leading Span A rises above Leading Span B, this shows that there is an uptrend and the space between these lines is colored green. Also, when Leading Span A falls below Leading Span B, this confirms a downtrend, and the space between these lines is colored red.