What Is the Ichimoku Cloud?

Ichimoku Cloud Trading Strategy

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Third, the stock turns back up with a move above the Conversion Line. There are also three criteria for a bearish signal. First, the trading bias is bearish when prices are below the highest line of the cloud. This means price is either below the cloud or has yet to break above cloud resistance. Second, price moves above the Base Line to signal a bounce within a bigger downtrend.

Third, a bearish signal triggers when prices reverse and move below the Conversion Line. Even though the stock declined from January until August , the trading bias shifted three times from January to June blue box.

Signals 1 and 2 resulted in whipsaws because the SNDK did not hold the cloud. The trading bias can change often for volatile stocks because the cloud is based on lagging indicators. A relatively strong trend is required to sustain a trading bias. Prices remain above the lower cloud line during a strong uptrend and below the upper cloud line during a strong downtrend. The trading bias shifted to bearish in early June and remained bearish as a strong decline unfolded.

There were two sell signals during this period. Signal 3 resulted in a whipsaw, but Signal 4 preceded a sharp decline. After a sharp reversal in August, the trading bias turned bullish with the upside breakout in September and remained bullish as the advance extended.

The first pullback produced a buy signal 5 with a dip below the Base Line red and subsequent move above the Conversion Line blue. Chartists can use volume to confirm signals, especially buy signals. A buy signal with expanding volume would carry more weight than a buy signal on low volume. Expanding volume shows strong interest and this increases the chances of a sustainable advance. Chartists also need to consider a strategy for stops, which can be based on indicators or key levels on the actual price chart.

The low just before a buy signal would be logical for an initial stop-loss after a buy signal. The high just before a sell signal would be logical for an initial stop-loss after a sell signal. Once the trade is underway and prices move in a favorable direction, chartists should consider a trailing stop to lock in profits. Some traders set stops two ATRs below current prices for long positions and two ATRs above current prices on short positions.

This Ichimoku Cloud system provides chartists with a means to identify a trading bias, identify corrections and time turning points. The cloud sets the overall tone and provides a longer perspective on the price trend. The Conversion Line blue is a relatively short-term indicator designed to catch turns early. Catching the turn early will improve the risk-reward ratio for trades.

Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences, and personal judgments.

Click here for a chart of IBM with the Ichimoku trading strategy. The element that distinguishes the strength of the signal is where the signal is placed respect the Kumo, but in some cases there can be other indicators that can help the trader in the interpretation.

The generated signal is bullish when the Tenkan Sen cuts the Kijun Sen from the bottom to the top. However, these signals, have a different degree of strength according to the position in which this signal occurs with respect to Kumo. A weak bullish signal is recorded when the cutting of the two lines occurs below the Kumo.

A neutral bullish signal is recorded when the cutting of the two lines occurs inside the Kumo. A strong bullish signal is recorded when the cutting of the two lines occurs above the Kumo.

The bearish signal is generated when the Tenkan Sen black line cuts the Kijun Sen red line from the top to the bottom. A weak bearish signal is recorded when the cutting of the two lines occurs above the Kumo. A neutral bearish signal is recorded when the cutting of the two lines occurs inside the Kumo. A strong bearish signal is recorded when the cutting of the two lines occurs below the Kumo. The generated signal is bullish when the price cuts the Kijun Sen red line from the bottom to the top.

A weak bullish signal is recorded when the Kijun is cut from the price below the Kumo. A neutral bullish signal is recorded when the Kijun is cut from the price inside the Kumo.

A strong bullish signal is recorded when the Kijun is cut from the price above the Kumo. The generated signal is bearish when the price cuts the Kijun Sen red line from the top to the bottom. A weak bearish signal is recorded when the Kijun is cut from the price above the Kumo. A neutral bearish signal is recorded when the Kijun is cut from the price within the Kumo.

A strong bearish signal is recorded when the Kijun is cut from the price below the Kumo. A bullish signal occurs when the price enters the Kumo and breaks its upper wall upward. A bearish signal occurs when the price enters the Kumo and breaks its lower wall downward. Since the two Senkou lines are projected forward by 26 periods respect the current price, the element to be checked when the signal is realized is where the price is positioned compared to the Kumo.

The generated signal is bullish when the Senkou Span A blue line cuts the Senkou Span B purple line from the bottom to the top. A weak bullish signal is recorded when at the cutting time between the two Senkou, prices are positioned below the Kumo.

A neutral bullish signal is recorded when at the cutting time between the two Senkou, prices are positioned inside the Kumo. A strong bullish signal is recorded when at the cutting time between the two Senkou, prices are positioned above the Kumo. The generated signal is bearish when the Senkou Span A blue line cuts the Senkou Span B purple line from the top to the bottom.

A weak bearish signal is recorded when at the cutting time between the two Senkou, prices are positioned above the Kumo. A neutral bearish signal is recorded when at the cutting time between the two Senkou, prices are positioned inside the Kumo. A strong bearish signal is recorded when at the cutting time between the two Senkou, prices are positioned below the Kumo. When the Chikou Span rises above or falls below the corresponding price then this signal is generated.

An important element is also represented by the inclination of the Chikou Span at the time of the observation. In fact, the Chikou positioning above or below the corresponding price is not enough; it also must have an upward inclination for bullish signals and a downward one for those bearish. Since the Chikou is nothing more than the current closing price moved back by 26 periods, the necessary elements are: The positioning of the current price compared to the Kumo then contributes to make the signal more or less powerful.

The generated signal is called bullish when the Chikou Span yellow line cuts the price from the bottom to the top.

Ichimoku Cloud Trading Strategy Explained

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