What Is Ichimoku Cloud and How to Apply It to Crypto Trading?

At first glance, the Ichimoku Cloud seems sophisticated, but once you learn how to read the charts, it becomes easy to understand and apply.

The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a combination of technical indicators, especially in levels of support and resistance that reveal the overall strength and direction in the crypto market.

The Ichimoku Cloud works by plotting multiple averages on the charts. Then it uses those figures to create a cloud that predicts where the price of a cryptocurrency may find support or resistance in the future. By mastering the Ichimoku Cloud, you can easily make high-probability decisions without spending most of your time analyzing trading view charts.

Ichimoku Cloud Explained

The Ichimoku Cloud relies on both lagging and leading indicators to display data. The charts in the Ichimoku system are composed of five main components or lines: Base Line, Conversion Line, Lagging Span, Leading Span A, and Leading Span B.

Base Line

The Kijun-sen line, or the Base Line, is the midpoint of the last 26 candlesticks. This line is calculated using the following formula:

[(26-period high+26-period low)/2]

Conversion Line

The Tenkan-sen line, which is also known as the Conversion Line, is the midpoint of the last 9 candlesticks. This line is calculated using the formula: 

[(9-period high+9-period low)/2] 

Lagging Span Line

The Chikou Span, also known as the Lagging Span, is the closing price of the current period. As its name suggests, the lagging span lags behind the price and is projected 26 periods into the past.

Leading Span A

The Senkou Span A, or Leading Span A, forms one of the two cloud boundaries. This line represents the midpoint (or moving average) of the baseline and the conversion line, plotted 26 periods into the future. The Leading Span A is the faster-moving cloud boundary and is calculated using the formula:

[(conversion line+baseline)/2]

Leading Span B

The Senkou Span B, or Leading Span B, forms the second cloud boundary and is the midpoint of the last 52 price bars (or the 52-period moving average). It is calculated using the formula:

[(52-period high+52- period low)/2]

The Leading span B is plotted 26 periods into the future and is the slower cloud boundary.

Kumo Cloud

The Kumo Cloud is located within the space between the Leading Span A and the Leading Span B. This is the most notable element of the Ichimoku system. Since both the Leading Span A and the Leading Span B are plotted 26 periods into the future, they help in forecasting and are therefore considered leading indicators. The Lagging Span, which is plotted 26 periods into the past, is considered a lagging indicator.

For easy reference, the Ichimoku Cloud is displayed in either red or green. The Leading Span B is the red cloud line, while the Leading Span A is the green cloud line. A red cloud is formed when the Leading Span B is higher than the Leading Span A, while a green cloud is formed when the Leading Span A is higher than the Leading Span B.

As you might have noticed in the formulas for calculating different lines in the Ichimoku Cloud, the moving averages used are not based on the closing prices of the candles, but rather on the high and low points recorded in a given period.

How to Interpret the Ichimoku Cloud

Although the Ichimoku Cloud involves five different lines, reading the graph is relatively easy. To interpret the Ichimoku Cloud, start by identifying the Leading Span A and the Leading Span B.

Once you have identified the two lines, shade in the cloud. If the Leading Span A is below the Leading Span B, the cryptocurrency is moving in a negative direction and the cloud should be shaded red. On the other hand, if the Leading Span A is above the Leading Span B, it is an indication that the price of the crypto asset is gaining momentum. You should therefore shade the cloud green.

Now that you have an Ichimoku Cloud, you can easily use it to generate momentum and trend-following signals. Here’s how.

Momentum Signals

Momentum signals are generated depending on the relationship between the market price, the Base Line, and the Conversion Line. If either the market price or the Conversion Line, or both of them, move above the Base Line, a bullish momentum signal is produced.

Bearish momentum signals occur when either the market price or the Tenkan-sen, or both of them, move below the baseline.

The crossing between the Tenkan-sen and the Kijun-sen is known as the TK cross.

Trend-Following Signals

Trend-following signals are generated according to the position of the market price in relation to the cloud, as well as the color of the cloud. If the prices are consistently above the cloud, the cryptocurrency is in an upward trend. If the prices are below the cloud, the cryptocurrency is bearish, or in a downward trend. Except for a few exceptions, the market is considered neutral or flat if the price is moving sideways within the cloud.

Another element that can help you spot and confirm a trend reversal is the Chikou Span or lagging span. This line gives you insights into the strength of price action. It may possibly confirm a bearish trend if it moves below the market prices, and a bullish trend if it moves above the market prices. Normally, you will have to use the Chikou Span in conjunction with other components on the Ichimoku Cloud, rather than using it on its own.

You can also use the Ichimoku chart to identify support and resistance zones. The Leading Span A, or green cloud line, usually acts as the support line during an uptrend and as the resistance line in a downtrend. In both cases, the candlesticks will move closer to the Leading Span A.

The Leading Span B can also act as the support or resistance line when the prices are in the cloud. Because both the Leading Span A and the Leading Span B are leading indicators, you can use them to predict future resistance and support zones.

The strength of the Ichimoku Cloud signals depends on whether they match the broader trend. If a signal is part of a larger, clearly defined trend, it is much stronger than a signal that briefly crops up in the opposite direction to the prevailing trend.

In simple terms, if a bullish signal is not accompanied by a bullish trend, the signal is weak. So, before you act on a signal, consider the position and color of the cloud, as well as the volume.

Ichimoku in the Crypto Market

After spending three decades on research and testing, Goichi Hosada, the inventor of the Ichimoku Cloud, decided that the (9, 26, 52) setting has the best results. Back in the day, the Japanese business schedule included Saturdays. The number nine, therefore, represented one and a half weeks, and the numbers 26 and 52 represented one and two months, respectively.

These settings are still used in many trading contexts. However, for the cryptocurrency markets, traders adjust the Ichimoku setting to reflect the 24/7 markets. The settings, therefore, change from (9, 26, 52) to (10, 30,60). Some traders also adjust the settings to (20, 60, 120) in an attempt to minimize false signals.

The debate is still ongoing as to whether it is efficient to modify the settings. While some traders are convinced that it’s vital to edit Ichimoku settings, others are worried that adjusting the settings will disrupt the balance of the Ichimoku system, producing a lot of invalid signals.

Limitations of the Ichimoku Cloud

One of the downsides of using the Ichimoku Cloud is that the tool depends on historical data. Although this data can sometimes be used to predict the future, there are no guarantees that the past will be repeated.

The Ichimoku Cloud, like all other technical indicators, can sometimes produce false signals. When it is used on smaller time frames, the Ichimoku Cloud may not account for larger trends.

Combination of Other Technical Analysis Tools With Ichimoku Cloud

Even in trending cryptocurrency markets, the Ichimoku indicator is rarely used alone. Traders combine other technical analysis tools and methods with the Ichimoku Cloud to better predict support and resistance levels.

Some of the more popular trading indicators used in tandem with Ichimoku include:

· Volume

· Momentum oscillators, such as StochRSI

· Bollinger Bands, used to provide some range-like bounds even when the market is trending

· Fibs — used to determine the most probable reversal area.

Is Ichimoku Efficient for Crypto Day Trading?

Cryptocurrency trading involves buying a cryptocurrency and selling it to make a profit. Depending on your goals and how long you would like to hold on to your cryptocurrency, you can choose to split your trading into long-term or short-term.

Day trading involves holding your cryptocurrency for very short periods from a few minutes to a few hours. The goal is to sell your cryptocurrency before the end of the day and make a small but quick profit.

The Ichimoku Cloud is a useful tool for crypto day trading. The best Ichimoku day trading strategy is the edge-to-edge cloud setup. According to this strategy, whenever a candlestick closes inside the Ichimoku Cloud, the price shifts to the opposite side of the Kumo.

The Ichimoku buy sell signals are candlestick forms below the Kumo Cloud and closes above the leading span A, a buy signal occurs. A sell signal, on the other hand, appears when a candlestick forms above the Kumo Cloud breaks and closes below the leading span A.

If you are day trading cryptocurrencies, the Ichimoku Cloud will give you enough edge-to-edge trade signals to help you reach your profit goals. However, you can always use other elements of the Ichimoku indicator to filter out false signals.

Bottom Line

The Ichimoku Cloud is an efficient, sophisticated cryptocurrency trading tool that is actually easy to understand and use. The technical indicator minimizes the human input needed to trade, especially when compared with other technical indicators.

Don’t forget to use the Ichimoku Cloud together with other indicators in order to confirm trends and minimize the risks of crypto trading. Click here for more crypto trading tips and tricks.