What is the Ichimoku Cloud?

Ichimoku Cloud is a moving average-based forex trading indicator which was developed in 1930 by Goichi Hosoda, a journalist of a Japanese newspaper. He analyzed this indicator for 30 years and published his findings in the late 1960s.

Traders consider Ichimoku Cloud as a versatile indicator because it works to improve the accuracy of forecast price moves, defines support and resistance of the market, and determines the market trend at the same time.

How to set up Ichimoku Cloud on the TradingView chart?

It takes only 3-simple steps to complete the Ichimoku Cloud set up on TradingView charts:

  1. Click on the ‘Indicator & Strategies’ icon and find the Indicator lists:

  1. Scroll down the indicator menu and find Ichimoku Cloud on the list:

  1. Select/click on Ichimoku cloud and you’re done with the setup, your chart will appear like the following image:

Interpretation of Ichimoku Cloud

  • Lagging Span: Lagging Span represents past 26-day Moving Average which is calculated based on closed prices over the selected period of time. It moves above all other moving averages of this indicator when the trend is bullish. In the opposite way, it goes below all the moving averages of Ichimoku Cloud when the market trend turns into bearish.
  • Conversion Line: It moves closely with the price candles and reacts exponentially with the change in price actions. For bullish trends, price candles must close above the conversion line and the conversion line itself should remain below the lagging span. Contrarily, conversion line moves above the price candles and the lagging span moves below the conversion line signals the bearish trend of the market.
  • Base Line: This is created based on a 26-day period moving average calculated based on both high and low of the price over the selected time spans. Base line moves below the conversion line is considered as the confirmation of the bullish trend of the market. Conversely, the conversion line moves below the base line means the validity of the bearish market trend.
  • Leading Span A and B: Leading Span A represents a 26-day average of the difference between base line and conversion line. On the other hand, Leading Span B represents the 52-day moving averages based on both high and low of the price bars over the selected periods. Both these leading spans work together to create the trend clouds and plot crossover trend signals. Leading Span A moves above Leading Span B means the bullish crossover and Leading Span A goes below Leading Span B is considered as the bearish crossover signal of the market trend.
  • Trend Cloud: The distance between Leading Span A & B is considered as the Trend Cloud. This cloud represents the dynamic support or resistance levels of the market and helps traders to update their stop-loss positions based on the changes in cloud positions. Furthermore, it also helps you to define market trends. Price closes above the cloud mean a primary indication of the bullish trend and for a bearish trend, price candles must be closed below the cloud levels.
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Ichimoku Cloud rules for long entry

  • Price moves above both trend cloud and conversion line
  • Leading span A & B plot bullish crossover trend signals
  • Conversion line moves above the base line
  • Lagging span remains above all the moving averages of the indicator
  • Activate your buy entry when all of the above conditions are met.
  • Set stop loss below Leading Span B level
  • Exit long/take profit whenever lagging span moves below the conversion line

Example:

This is an hourly chart of Gold, representing a buy entry setup based on Ichimoku Cloud trading signals. Initially, the price was roaming right below the cloud and moving averages of the indicator. Just after the price has moved above the clouds, all other components of the indicator also started to confirm the bullish trend signals. Price bar closed above the conversion line, Lagging Span was already moved above all other indicators, and Conversion line moved above the Base Line.

Once all the requirements are met and a bullish bar closed above the Trend Cloud, we triggered a buy entry at the break of the respective bullish bar’s high. As per rules, we set a stop loss limit right below the Leading Span B level. After the execution of the buy entry, the price started to surge upwards and made a significant bullish move until lagging span moved below the conversion line giving a trade exit or a take profit point.

Ichimoku Cloud rules for short entry

  • Price moves below both trend cloud and conversion line
  • Leading span A & B plot bearish crossover trend signals
  • Conversion line moves below the base line
  • Lagging span remains below all the moving averages of the indicator
  • Go for sell entry when all of the above conditions are met
  • Set stop loss above Leading Span A level
  • Exit short/take profit whenever lagging span moves above the conversion line
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Example:

This GBP/USD (British Pound vs US Dollar) hourly chart is an example of sell setup using Ichimoku Cloud indicators. At the early stage, lagging span moved below other moving averages of the indicator which is considered as an early signal of a possible bearish trend of the market.

Later, the price moved below the trend clouds and conversion line, the Base Line went above the conversion line, and Leading Span A moved below Span B plotting the bearish crossover signals. Once all the conditions are met, we set a sell entry level right below the bearish candles closed under the Trend Cloud with a stop loss limit above the Leading Span B level.

Later, the price dropped about 100 pips lower from the area of sell entry representing a successful sell setup. Once the lagging span moves above the conversion line, we considered the area as a take profit/trade exit level.

Conclusion

Ichimoku Cloud says everything you need to know about the market trends including momentum, direction, dynamic support/resistance levels, trade entry levels, stop loss positions, and possible take profit/trade exit areas.

As one of the oldest trend-following indicators, Ichimoku Cloud has been widely admired by both newbie traders and experienced professionals over the decades. Moreover, as a versatile indicator, it can also be used in conjunction with other trend-based trading indicators and strategies.

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