Ichimoku Cloud or simply Ichimoku is a collection of technical indicators that show support and resistance levels as well as momentum, strength of a trend and trend directions. In addition, the indicator produces trading signals. Let’s dive deep and find out more about the indicator and learn how to use it in Forex.
Ichimoku Indicator Overview
The idea behind trading with Ichimoku FX indicator is that the indicator enables traders to analyze markets with one glance. The indicator might seem complex from the start, but once you understand how its components work, it’s really simple. When it comes to receiving information, the Ichimoku indicator in Forex trading provides information about the past, present and makes future predictions simultaneously.
- Indicator type: Leading Indicator
- Best timeframe to use – 6 hour chart
- Goes best with: RSI
- Placed on: On the chart
Technical details of Ichimoku indicator
As we mentioned in the beginning, Ichimoku Cloud is a combination of multiple technical indicators that provide us with trend and momentum directions along with support and resistance levels. It is known to provide traders with numerous data points. Which in turn translates into more reliable and accurate trading signals.
How to calculate the Ichimoku indicator
Understanding Ichimoku indicators can be complex, let’s break it down to simple components to get a better idea on how it works. The indicator uses 9, 26, and 52-period highs and lows as standard timeframes. These highs and lows are used in the following formulas:
Conversion Line = 9-PH + 9-PL / 2
Base Line = 26 PH + 26PL / 2
Leading Span A = Conversion Line + Base Line / 2
Leading Span B = 52-PH + 52-PL / 2
Lagging Span = Close spotted 26 periods in the past
PH = Period High
PL = Period Low
Once the calculations are done, the trading software automatically displays the lines and areas on trading charts for us.
What does Ichimoku Indicator tell us
The Ichimoku indicator in Forex trading is referred to as a cloud because of its appearance, as it seats on the chart and resembles a cloud. Ichimoku is a highly visual indicator that enables traders to visually scan various markets quickly.
When traders see the price of any given asset sitting above the cloud, it means we have an uptrend. If the price is below the cloud, it means that a downtrend is ongoing. And when the price is inside, the cloud market is in range or in transition.
The color of the cloud is also important. If leading span A is above the leading span B, the cloud is green and the market is on an uptrend. If we see that the cloud is red, it means that the leading span B is above the leading span A, and we have a downtrend. This cloud can also be used as a support and resistance levels and unlike other indicators, it can even project future resistance and support levels. This is what makes it a leading indicator.
Practical application of Ichimoku indicator
When using the Forex Ichimoku indicator, keep in mind that the indicator is not as complex as it appears to be. On the upside, it can be used in practically any market and in any timeframe. The indicator is not only useful for trading Forex, but for Stocks, Futures, Commodities, Crypto, and other asset classes. Let’s take a look at Ichimoku indicator example below.
One of the best strategies to use when trading with the Ichimoku indicator is to look for uptrends with different signals.
To begin with, we should look for a price to break above the cloud. The Ichimoku cloud shows multiple layers of support and resistance levels, meaning that if the price breaks above the cloud, there is a significant shift in the market. Afterward, we need to wait for confirmation, as just one shift in the market is not enough to fully trust the signal. This confirmation can be in the form of a crossover of baseline and baseline, and once this happens, we can enter the trade. The trade can be entered at the opening price of the next candle, and we can protect this position by placing a stop-loss order. This stop-loss can be placed just below the low of the breakout candle, and by doing so we will be minimizing potential losses that we can suffer. Along with stop-loss, we will also need to implement a take-profit order, and this take-profit can be simply when the conversion line falls below the baseline.
The best thing about this strategy is that it can be reversed and used for trading short positions. In the reverse strategy, everything is mirroring the uptrend strategy.
History and other useful details of Ichimoku indicator
Ichimoku Hinko Hyo or Ichimoku indicator for short was developed in the late 1930s by a Japanese journalist Goichi Hosoda, who was known as Ichimoku Sanji. The developer didn’t introduce the indicator to the public right away and spent 30 years perfecting it, before finally releasing it in the 1960s. Despite finding popularity easily all across Asia, Ichimoku gained recognition in the west only in the 1990s. However, even during this time it was not very popular due to the lack of information. Many western traders saw Ichimoku as another weird charting method and as a result, not many took the time to learn and understand this indicator. However, in the following years, traders began to appreciate the indicator for its ability to display massive amounts of information in a condensed space efficiently.
FAQs on Ichimoku indicator
Is Ichimoku a good indicator?
Yes, Ichimoku is a very good and highly useful indicator for quick visual scans. Despite being a complex-looking indicator, traders who take time to learn this indicator will benefit greatly from the insight it provides into the market.
How successful is Ichimoku indicator in FX trading?
The Ichimoku indicator is considered to be a successful indicator in providing reliable trading signals. The reason behind this belief is that the indicator integrates various components and creates trading signals.
Can Ichimoku indicator be used alone?
Yes, the Ichimoku indicator can be used alone, as it provides very good insight into the market. Many traders couple the Ichimoku with the RSI indicator to increase probability. However, keep in mind that combining various strategies and indicators is not always a great idea, as it often results in analysis paralysis.