How to Use the Ichimoku Cloud to Identify Trade Setups
When it comes to technical analysis, admittedly there are some odd names.
The abandoned baby bottom, the doji cross, and even the hanging man are some of the oddest. But they’re also some of the most powerful indicators known to technical traders because of how often they’re used to make trading decisions.
Another oddly named, but powerful indicator to be well aware of is The Ichimoku Cloud, which displays support and resistance, momentum and trend all in one chart.
Each cloud includes the following:
- Chikou Span
- Senkou Span A
- Senkou Span B
Let’s start with the cloud itself, which is made up of Senkou Span A and B.
According to StockCharts.com:
First, the trend is up when prices are above the Cloud, down when prices are below the Cloud and flat when prices are in the Cloud. Second, the uptrend is strengthened when the Leading Span A (green cloud line) is rising and above the Leading Span B (red cloud line). This situation produces a green Cloud. Conversely, a downtrend is reinforced when the Leading Span A (green cloud line) is falling and below the Leading Span B (red cloud line).
But wait, there’s more.
When the TenkanSen (blue line) and KijunSen (red line) are above the cloud, the trend is positive. If the two are below the cloud, the trend is then considered negative.
We can see this play out in Micron Technology Inc. (MU) for example.
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Also, a buy signal is reinforced when Tenkan-Sen crosses above the Kijun-Sen while the two are above the cloud. A sell signal is then reinforced when the Tenkan-Sen crosses below the Kijun-Sen while the two are below the cloud.
The Chikou Span (green line) is a lagging indicator based on 26-periods. When the Chikou span is above the asset price, the market is said to be bearish, and when the Chikou span is below price, the market is said to be bullish.
With Chikou Span for example, look at Micron Techology Inc. again.
Notice what happens when the green line moves decidedly above the price of the stock. It helps us identify a bullish situation.
Of course, we can always confirm our findings with Bollinger Bands (2,20), relative strength (RSI), MACD, Money Flow (MFI) and Williams’ %R (W%R).
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