In order to be successful in investing in digital currencies or many other financial markets such as the stock market and Forex, we need to be familiar with the science of technical analysis. Then join us to learn one of the tools used in technical analysis called the Ichimoku cloud.
The Ichimoku cloud is a method for technical analysis that combines several indicators into a single chart. This method is used in candlestick charts as a trading or trading tool, which gives us a very good view of the support and resistance areas of the price.
This tool is also used for forecasting and many traders use it to determine the direction of the future trend and market movement.
The concept of the Ichimoku cloud was first coined in the late 1930s by a Japanese journalist named Guichi Hosada. But his creative trading strategy was introduced in 1969, after decades of technical study and development.
Hosada named its innovative tool Ichimoku Kinko, which means “balance chart at a glance” in Japanese.
how it works?
The Ichimoku cloud system displays information based on forward and backward indicators, and its chart consists of 5 lines:
- Trend change line or age thinner(Tenkan-sen): Moving average of 9 periods (blue line)
- Standard line or Keijun Sen. (Kijun-sen): Moving average of 26 periods
- Leading line or Senco Span A. (Senkou Span A) : The moving average is the trend line and the standard line, which has been moved 26 times to the right, that is, to the future.
- Leading line or Senco Span B. (Senkou Span B): The moving average of 52 cycles is obtained by moving the candles 26 cycles to the right (forward).
- Delay Line or Chico Span (Chikou Span): Closing price in the last 26 periods.
The space between the forward line A and the forward line B is what produces the Como cloud, which seems to be the most important part of the Ichimoku system. These two lines provide a forecast of the future by shifting 26 cycles forward, which is why they are considered as leading indicators.
The Chico Span or Delay Line is a regression indicator that is achieved by moving 26 cycles left or back.
By default, these clouds are displayed in green and red to make them easier to read.
A green cloud is created when the forward line A (green cloud line) is above the forward line B (the red cloud line).
Naturally, if the situation is the opposite of what has been said, a red cloud will form.
It should be noted that unlike other methods, the moving averages used by the Ichimoku strategy do not work based on the closing price of the candles. Instead, they are calculated based on the highest and lowest points recorded in a given period (high-low average).
For example, the standard equation for a 9-day trend change line is as follows:
2 / (maximum amount recorded in the 9-day period + minimum amount recorded in the 9-day period) = age thin line
After three decades of research and experimentation, Guichi Hosada concluded that time period settings (9,26,52) work best. At that time, the work schedule in Japan also included Saturdays (only Sundays were closed), so the number 9 was a week and a half (6 + 3 days). The numbers 26 and 52 also showed one and two months, respectively.
While these settings are still preferred in most trading areas, experts who use charts are always able to adjust these numbers to suit different strategies.
For example, in the digital currency market, many traders adjust the Ichimoku settings based on the 24.7 market (there is no shutdown in the digital currency market and these markets are open 24 hours a day, seven days a week) from (9,26,52) to (10,30,60) change. Others go a step further and change the settings to (20,60,120) to reduce incorrect signals.
However, there is still debate as to the best possible correction for these settings.
Some argue that it makes sense to change the settings given what is happening in the digital currency market timing, but others argue that changing the settings from their original default mode may upset the system balance and cause many invalid signals. Produce.
Ichimoku Trading Signals
Due to the many elements used in Ichimoku, the Ichimoku cloud produces different types of signals, which can be divided into trend signals and motion signals.
Motion signals: These signals are generated according to the relationship between the market price, the standard line and the return line.
Upward signals are generated when one or both return lines and the market price move above the standard line.
Downward signals are generated when one or both of the return lines and the market price move below the standard line.
The intersection between the return line (Tonkan Sen) and the standard line (Keijon Sen) is often referred to as a TK cross.
Process signals: These signals are generated based on the color of the cloud and the market price position relative to the cloud.
As mentioned, the color of the cloud indicates the difference between the ranges of the progress lines A And B Is.
It is easy to say that when prices are repeatedly above the cloud, there is a high probability that the asset will be on the rise. Conversely, when prices are below the cloud, it can signal the beginning of a downtrend.
With a few exceptions, when prices move forward within the cloud, it can be a sign of a flat or neutral trend.
Chico Span, which is a reversal indicator, is another tool that can help traders and confirm reversal trends. This index gives a good view of price action (price action), which can detect an uptrend when this index moves above market prices or, conversely, a downward trend when this index moves below market prices.
Typically, the delay line is not the only application and is used in combination with other Ichimoku cloud components.
If the market price moves above the standard line, it is a signal to detect an uptrend, and if it moves below the standard line, it is a confirmation of a downtrend.
TK cross: If the trend line moves above the standard line (uptrend) and below the standard line (downtrend).
Trends following signals
Market prices move above the Ichimoku cloud (uptrend) and move below the cloud (downtrend).
The color of the cloud changes from red to green (upward trend) and from green to red (downward trend).
A reversal line or a delay above market prices, an upward and downward trend in market prices, is a downward trend.
Support and resistance levels
The Ichimoku chart can also be used to identify support and resistance areas. Typically, the forward line A (green cloud alarm line) acts as a support line during the uptrend and as a resistance line during the downtrend.
In either case, chart candles tend to move closer to the A line, but if the price moves inside the cloud, the B line may also act as a support / resistance line. In addition, there is the fact that both the A and B front lines, with forecasts for the next 26 periods, allow traders to forecast support and resistance areas.
The strength of the signals generated by the Ichimoku cloud strongly depends on whether they are in line with the broader trend. A signal that is part of a clearer and larger trend is always stronger than a signal that is in the opposite direction of the dominant trend.
In other words, if an uptrend is not accompanied by an uptrend, that signal may be misleading and inaccurate. Therefore, when a signal is generated, its color and position relative to the cloud are very important. Trading volume is also a parameter that must be considered.
It should be noted that the use of Ichimoku in smaller timeframes (charts with less than daily timeframes) leads to the production of incorrect signals. In general, longer timeframes (daily, weekly, monthly) produce more reliable price movements and more accurate trend signals.
The last word
Guichi Hosada devoted more than 30 years to creating and modifying the Ichimoku system, which is now used by millions of traders around the world.
As a comprehensive graphing method, Ichimoku clouds are used both to detect market trends and to determine market movement. Leading lines also make it easier for traders to identify potential resistance and support levels that have not yet been tested.
Although the chart may seem too crowded and complicated at first, it does not, like other methods of technical analysis, depend on human intervention (such as drawing trend lines).
Despite the challenges with Ichimoku settings, its strategy is relatively easy to use.
This system must be used in combination with other methods so that it can be used properly to confirm the process and reduce trading errors.
The amount of information that this chart shows may be overwhelming and confusing for beginners. As a result, it is often advisable for such traders to work with more basic indicators before starting to work with the Ichimoku cloud.
You can also learn how to trade with Ichimoku by participating in the Digital Currency Atlas course with the support of experienced instructors. Part of Ichimoku training in Atlas Digital Value Plus course: