Trading the clouds – Ichimoku

by Anand Krishnamurthy


Posted on July 8, 2018



Curiosity killed the cat and that’s the perfect definition of who I am. Let me welcome you all to Trading In Zones (TiZ) and thank you for spending precious time to read my blog Post!


There are three levels to build a trading mindset with any indicator. Understanding, Interpreting and Implementing. So, let’s go one by one to see where we can get.

I love History it gives a great start always to know who did what and why. The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a versatile indicator like its founder. Goichi Hosoda - interesting names, don’t we have one!! A Japanese journalist; yeah, that’s true JOURNALIST. He was known as Ichimoku Sanjin - meaning, “What a man in the mountain sees”. He spent 30 long years before he published what he found in 1960. That’s good enough back testing I guess, savings time for us


Ichimoku Kinko Hyo translates to ‘one glance equilibrium chart’ or instant look to understand the balance of the chart. Well, I’ve just copied that from Wikipedia for you, now don’t laugh I had to learn somewhere as well :D


Now the history is done, we can move to next level - Understanding!


The wheels behind the motor, I love this thing. As a kid whenever I got a toy first thing I wanted to do was open it and see what’s inside, which makes it work. Remember, I’m a curious CAT!


Oh! Common it’s moving average not again this shit never works. That’s the first feeling and yes, that's true when you’ve failed beyond anyone’s expectation nothing seems to work.


Understanding

The Formulae - Mostly people hate this part.


Tenkan-Sen (Conversion Line): (9-period high + 9-period low)/2))


The default setting is 9 periods and can be adjusted. On a daily chart, this line is the midpoint of the 9-day high-low range, which is almost two weeks.


Kijun-Sen (Base Line): (26-period high + 26-period low)/2))


The default setting is 26 periods and can be adjusted. On a daily chart, this line is the midpoint of the 26-day high-low range, which is almost one month).


Senkou Span A (Leading Span A): (Conversion Line + Base Line)/2))


This is the midpoint between the Conversion Line and the Base Line. The Leading Span A forms one of the two Cloud boundaries. It is referred to as "Leading" because it is plotted 26 periods in the future and forms the faster Cloud boundary.


Senkou Span B (Leading Span B): (52-period high + 52-period low)/2))


On the daily chart, this line is the midpoint of the 52-day high-low range, which is a little less than 3 months. The default calculation setting is 52 periods but can be adjusted. This value is plotted 26 periods in the future and forms the slower Cloud boundary.


Chikou Span (Lagging Span): Close plotted 26 days in the past


The default setting is 26 periods but can be adjusted.


Most trading platforms provide you this indicator as a standard. I love Trading View and I add the default indicator to getting the cloud setup on my screen. Here’s a quick peak




Let’s interpret it now, these formulae are always like yikes!! Somebody make me understand, every-time I read I’m like what is it doing, Help!!!


Interpretation





The Cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots. It’s something that confuses a trader with so many lines who is not able to understand what is happening on the chart.


The Leading Span A (green) is coming from the midpoint of conversion line and baseline. Leading Span B (red) forms the other part of the Cloud, which is calculated as a mid-point from 52 period high and low. (Refer to formulae above). The Leading Span A will move faster as it’s calculated for a shorter period, compared to the Leading Span B.


I mean, if you see the calculation of 9 period and 26 period which is referred to conversion line and base line are divided by 2 (considering the high point and low point). So, it’s the mid-point.


It is the same principle with moving averages. Short-term moving averages are more sensitive and faster than longer moving averages. Though it’s the midpoint of the period’s it’s picking up, quite interesting these midpoints are… they are not the average of the candlesticks (time frames matter)


An important factor to consider; where most traders don’t understand the calculation for interpreting charts. Timeframes do matter, if you are looking at the 1-day chart a 9 period would be 9 days high and low / 2. If you are looking at the same thing on a 5-minute chart, it’s last 9 period candlesticks or 9 5 min candlesticks high and low considered. This applies everywhere, so I have referred to it as a Period instead of Days.


Let quickly move to implementation before you are lost in the clouds!!


Implementation







There are two ways to identify the overall trend using the Cloud. First, the trend is up when prices are above the Cloud, down when prices are below the Cloud.


So, I’ve removed everything from the chart except the cloud to understand the trend. The first 2 lines have been depicted colorfully on above charts. These clouds are like smoke on the chart .. phoooo!! I know my friend Arif will be very happy when I say smoke


Understand this when it starts trending and cloud moves up it’s a great sign – remember yikes!! Formulae. Yes, it’s a mid-point of conversion line and baseline, which forms SPAN A. Meaning 9 period High Low, and 26 periods High Low – midpoint of these high lows has crossed. Price has crossed over and above… Bulls are back in action. Similarly, the vice-versa when bears take control!!!


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). This situation produces a red Cloud. Because the Cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.


In the clouds or range bound or choppy or consolidation – god knows how many more words. In simple it’s not moving in any damn direction. What happens then?






This happens – candles are stuck in clouds or just above or below. Clouds don’t go down or up.


Now the confusion begins what about the conversion line, baseline and lagging span 26 periods close why are they not on your charts. Well, hold onto your horses’ fellas. It’s on the way… eeehaaaaww!!


If you’ve read this far that means, I’ve been talking some sense or managed to keep you curious. Hopefully the latter so that it helps you explore more on the clouds.


The Cross Over (conversion line and baseline)






So the 9 periods mid-point on the daily chart above and the 26 periods mid-point do a cross over. What does that mean now? It means the price on short-term basis is moving up and above the long price, which is a positive signal. Remember this is not an average it’s a mid-point.


Also, conversion and baseline are faster in nature compared to the clouds. They move above and below very quickly. When the Conversion line (blue) crosses the Baseline (brown) and moves up above the cloud and cloud turns green move upward – you in for a bull run …hurray jackpot! Similarly, the vice-versa for a Bear zone… last but not the least to give you a sense of direction closing basis 26 period is added as an additional lagging indicator or line.


Hope you liked the way I’ve sliced and diced the clouds to make it easy for understanding, interpreting and implementing. There are multiple strategies to implement these clouds effectively for a scalp or a day trade and a swing. Join us and keep your juices high. Cheers!! – AK