Ichimoku Cloud Indicator

An collection of indicators showing trend direction & momentum →

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In today’s edition, we’ll talk about an indicator that tells us not 1 or 2, but 3 important things about a stock’s price…

The ‘one glance’ indicator

Developed by a Japanese journalist, the Ichimoku Cloud indicator is a set of 5 calculations, two of which form a ‘cloud’, an integral part of the indicator.

Known as the ‘one glance’ chart, Ichimoku helps you decode 3 things - the direction, the momentum, and the potential timing of a price trend.

Let’s learn how the Ichimoku indicator is constructed & how to use it to identify an uptrend or downtrend…

Understanding the Ichimoku Cloud

The Ichimoku Cloud is a combination of the following indicators:

1) Conversion Line: An average of the highest high and lowest low of the past 9 candles, acting as a short-term dynamic support-resistance.

2) Base Line: An average of the highest high and lowest low of the past 26 candles, acting as a longer-term dynamic support-resistance.

3) Lead Line 1: An average of the conversion line and base line, plotted up to 26 periods ahead, this line forms the first part of the cloud.

4) Lead Line 2: An average of the highest high and lowest low of the past 52 candles and plotted up to 26 periods ahead, this line forms the second part of the cloud.

5) Cloud: The area encompassed by the lead line 1 and 2, plotted 26 periods ahead, forms a cloud-like structure, called ‘Kumo’.

6) Chikou Span: Measuring momentum, the Chikou is a line chart of the current candles plotted 26 periods behind, considering only closing prices.

Decoding Uptrends & Downtrends

Criteria for an Uptrend:

> Price should be chased by a rising conversion line

> Conversion Line should be chased by a rising slanting upward Base Line

> Lead Line 1 should be above lead line 2

> Cloud should be bullish & Chikou should be above the cloud

Criteria for a Downtrend:

> Conversion line should chase the price downwards

> Base Line should be chasing the Conversion Line downwards

> Lead Line 1 should be below lead line 2

> Price should be below the cloud & Chikou should be free, forming its way downwards

The red & green lines highlight a downtrend and uptrend respectively, as per the rules of the indicator

Note: When the price of a stock is trading inside the Ichimoku cloud, it is considered volatile and lacking a trend, hence should be avoided.

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Build a trade setup using the Ichimoku Cloud indicator in Mr. Dinesh Nagpal’s Ichimoku Trading Course.

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