One of the most exotic, but also the most all-encompassing technical indicators available is Ichimoku Cloud.
As it compiles a collection of various indicators to provide measurements, by using Ichimoku Cloud, traders can spot trends, momentums, as well as support and resistance levels.
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The Ichimoku Cloud consist of 5 indicators/lines:
- Conversion Line (Kenkan sen) – Blue
- Base Line (Kijun sen) – Red
- Leading Span A (Senoku Span A) – Yellow
- Leading Span B (Senoku Span B) – White
- Lagging Span (Chikou Span) – Green
Formulas for each indicator/line
Conversion Line = (9 periods highest high + 9 periods lowest low)/2
Base Line = (26 periods highest high + 26 periods lowest low)/2
Leading Span A = (Conversion Line + Base Line)/2 plotted 26 periods ahead
Leading Span B = (52 periods highest high + 52 periods lowest low)/2 plotted 26 periods ahead
Lagging Span = Close plotted 26 periods in the past
The area between Leading Span A and Leading Span B forms the cloud. When Leading Span A is above Leading Span B the cloud is colored green. When Leading Span A is below Leading Span B the cloud is colored red.
As can be seen in the BCH / USD chart above, Leading spans A and B form the cloud between them. Also, the similarity to moving averages can easily be spotted as the correlation between the Conversion and Base Line is comparable to the relationship between a 9-day and 26-day moving average. Of course, and what can also be confirmed in our previous article about trend trading, 9 and 26 are the same periods used to calculate MACD.
Although comparable, Ichimoku readings are compiled in a different way than moving averages (MA). While MA takes closing prices throughout a certain period, add them up and divide by the number of points of closures, Ichimoku Cloud takes highest high and lowest low and divides it by two to reach a reference point.
Therefore, the two indicators will not look identical.
How to use Ichimoku Cloud in cryptocurrency trading?
As previously stated, Ichimoku Cloud reveals various market situations.
Trends
The cloud is primarily used to spot trends. If the price action is above the cloud, traders are witnessing a bullish trend, and the bearish trend is revealed when the prices travel under the cloud. The flat movement is exhibited by the prices moving through the cloud.
The strength of the trend is manifested by the color of the cloud.
If the Leading Span A line crosses over the Leading Span B, the cloud turns green (like in the chart below), which means that the bullish trend is strong in the given situation.
On the contrary, when the cloud turns red due to the Leading Span A crossing below Leading Span B, the strong bearish trend is bound to lower the prices of a cryptocurrency.
Resistances and supports
The Ichimoku Cloud is often used to try to foresee an area of support and resistance depending on the previously spotted trend.
As the BCH/USD chart above clearly shows, support and resistance levels are projected into the future, which sets apart this indicator from many others since they only provide levels in real-time.
However, those readings are far from perfect and traders should use other indicators to make a more educated decision. Frequently, experienced traders pair Ichimoku Cloud with Relative Strength Index (RSI) to provide more depth.
Bullish and bearish configurations
While some traders, while working with Ichimoku Cloud, tend to disable lines that they decided are insignificant at that particular moment, the full reading of the indicator can reveal bullish and bearish configurations according to the position of all five lines.
Typically, the most bullish configuration is when the lines, from the top to the bottom of the chart, form as follows:
- Lagging Span
- Conversion Line
- Base Line
- Leading Span A
- Leading Span B
On the other hand, the most bearish configuration would look like this:
- Leading Span B
- Leading Span A
- Base Line
- Conversion Line
- Lagging Span
Momentum
Some occurrences with Ichimoku Cloud indicator can also represent strong buy and sell signals.
According to the momentum, when the price action moves above the Base Line, this is considered to be a bullish signal, as well as when the Conversion Line moves above the Base Line.
Bearish signals, on the other hand, can be spotted once the price falls below the Base Line, or when the Conversion Line does the same.
Conclusion
As always, however exotic but useful Ichimoku Cloud indicator may be, it shows the most potential combined with other indicators.
Before taking the mentioned cloud projection for granted, traders should take a look if the cryptocurrency is overbought or oversold, or if there are some divergences to be spotted in other readings which can help them decide entry and exit points.
Furthermore, always have in mind that Ichimoku Cloud uses past readings in an attempt to foresee the future. As such, it can deceive and the prices may fall well short of traders expectations producing losses in the process.
The best thing for a trader to do is to educate himself as much as possible to utilize any given trading tool available and deduce the risk to a minimum.
Until the next time, trade responsibly.
Disclaimer: This article is not investment advice. Note that cryptocurrencies are highly volatile assets and very risky investments. Do your research or consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.
The post Meet Ichimoku Cloud – The Most Comprehensive Technical Indicator appeared first on Coinalyze Blog.
