The cryptocurrency market, similar to all financial markets, can fluctuate and get unpredictable at times, which is why crypto traders use a range of services and tools to formulate their trading strategies. TA or technical analysis is one of the most popular methods traders use to gauge the condition of the market.
To conduct technical analysis, cryptocurrency traders use technical indicators – tools that analyze a crypto’s price, trading volume, and interest rates, among other things. Technical indicators can be used to forecast a crypto’s value at a specific point of time in the future and figure out the most profitable of trading opportunities.
The Ichimoku Kinkō Hyō Cloud, or simply the Ichimoku Cloud, is one of the most prominent technical indicators in use in the crypto markets. In this post, we give you everything you need to know about the Ichimoku Cloud.
What Is the Ichimoku Cloud?
The Ichimoku Cloud is one of the oft-used methods for technical analysis; it’s best described as a combination of several technical indicators in a single chart. The Ichimoku Cloud calculates five past averages and marks them on a chart; the Ichimoku charts provide insight into potential support and resistance price levels, market momentum, market trends, and more. Traders mostly use the Ichimoku charts as a forecasting tool.
An Ichimoku Cloud Chart
The Ichimoku cloud was developed back in the late 1930s by a Japanese journalist called Goichi Hosoda. However, the Ichimoku charts strategy didn’t get published until 1969. Hosoda named the tool Ichimoku Kinkō Hyō- which translates to “equilibrium chart at a glance” in Japanese.
The Ichimoku Cloud is a moving average based trading indicator. A moving average or MA, if you aren’t aware, is a technical indicator that can make the crypto price trends within a specified period of time stand out by erasing out the random, short-term price fluctuations. By using multiple trading indicators, the Ichimoku Cloud produces more data points than your usual candlestick chart. Even though the Ichimoku chart might seem complicated at first, the technical indicator is capable of fabricating very precise trading signals.
How Does the Ichimoku Cloud Work?
Now let’s see how this particular method of technical analysis operates in crypto trading. The Ichimoku charts display information on the basis of both leading and lagging technical indicators. The usual Ichimoku chart consists of five lines, which are –
- The Conversion Line or the Tenkan-sen, with a 9-period moving average.
- The Base Line or the Kijun-sen, with a 26-period moving average.
- The Leading Span A or the Senkou Span A, with the moving average of the Conversion and Base Lines projected 26 periods in the future.
- The Leading Span B or the Senkou Span B, with a 52-period moving average projected 26 periods in the future.
- The Lagging Span or the Chikou Span, with the closing price of the current period projected 26 periods in the past.
Hosoda used the numbers 9,26, and 52 in the Ichimoku Cloud settings since they seem to produce the best results; back in Hosoda’s time, the Japanese business schedule included Saturdays, therefore the number 9 stands for a week and a half, or 6 + 3 days. As for 26 and 52, those numbers symbolize respectively one and two months.
While many people using the Ichimoku Cloud charts in today’s time avail Hosoda’s preferred setting, in crypto trading, traders can always adjust the numbers to fit their specific trading strategies better. For instance, many crypto traders tweak the Ichimoku Cloud settings to reflect the 24/7 markets, shifting from 9, 26, 52 to 10, 30, 60. To do away with false signals, some traders even adjust the Ichimoku settings to 20, 60, 120.
In the image above, we can see the Leading Span A at number 3 and the Leading Span B at number 4. The space between these two lines are responsible for producing the Kumo or the actual Ichimoku Cloud – the big green and red zones in an Ichimoku chart. The two aforementioned lines are projected 26 periods in the future to come up with forecasting insights and they are considered leading technical indicators. On the flip side, The Chikou Span (which can be seen at number 5 in the image above) is a lagging technical indicator which is projected 26 periods in the past.
The Ichimoku clouds are always shown in either green or red, since they make reading the Ichimoku charts easier. The Leading Span A is the green cloud line, and the Leading Span B is the red cloud line. When the Leading Span A is higher up than the Leading Span B on an Ichimoku Cloud chart, a green cloud is generated, and similarly, a red cloud forms when the opposite happens.
The Ichimoku Cloud varies from other technical analysis tools in the fact that the moving averages used by the Ichimoku charts are not calculated based off of the closing prices of the candles. Instead, the moving averages are computed based on the average of the high and low points documented within the specified period of time.
How to Use the Ichimoku Cloud Charts?
Below, you’ll find the standard equations for the first four lines that make up the Ichimoku Cloud trading indicator:
- The Conversion Line: (9 PH + 9 PL) / 2
- The Base Line: (26 PH + 26 PL) / 2
- The Leading Span A: (The Conversion Line + The Base Line) / 2
- The Leading Span B: (52 PH + 52 PL) / 2
Where PH stands for period high (the highest price seen during the given time period), and PL stands for period low (the lowest price seen within the specified time period).
As for the Lagging Span, the closing price of the current period is plotted 26 periods in the past.
Adding the Ichimoku Cloud technical indicator to your chart does the calculations for you.
What Can You Learn from the Ichimoku Cloud Charts?
1. Ichimoku Trading Signals:
Since there are multiple elements on the Ichimoku Cloud charts, the technical indicator produces different kinds of signals. They can be primarily divided into momentum and trend-following trading signals.
Momentum signals are produced based on the relationship between the market price, the Base Line, and the Conversion Line. When either or both of the Conversion Line and the market price are above the Base Line, bullish momentum signals are received. On the contrary, bearish momentum signals are generated when either or both of the Conversion Line and the market price are below the Base Line.
As for the trend-following signals, they are produced based on the color of the Ichimoku cloud, and the position of the market price in relation to said cloud. When the price of a specific crypto stays above the clouds, it can be assumed that there’s a high chance that the crypto is in an upward trend. However, if the price of the crypto is moving below the clouds, you may assume that the market is facing down. Further, if the market price for a crypto is moving sideways while staying inside the clouds, the market trend is usually considered flat or neutral.
The Lagging Span is another element that can help crypto traders in figuring out potential trend reversals. The line gives information regarding the strength of the price action, suggesting a bullish trend when it moves above the market prices, and a bearish trend when it does the opposite. However, generally the Lagging Span is used jointly with the other elements of the Ichimoku charts, and not only on its own.
2. Support and Resistance Levels:
The Ichimoku Cloud charts can be used to find out the support and resistance zones. How? Well, usually, the Leading Span A serves as a support line during upward market trends, and as a resistance line during the down facing market trends. In either of these scenarios, the candlesticks move closer to the Leading Span A or the green cloud line. In case the market price moves into the cloud, the Leading Span B may also similarly serve as a support and resistance line. Since both the Leading Span lines are plotted 26 periods in the future, the Ichimoku Cloud charts allow traders to forecast potential support and resistance zones.
Crossovers are another way to make use of this particular technical indicator. For instance, if the Conversion Line moves on top of the Base Line, especially when the market price for a crypto is above the cloud, it can be interpreted as a strong buy signal.
And there was everything you need to know about the technical analysis tool Ichimoku Clouds! If you’d like to find out more about new DeFi projects to invest in, crypto options trading, and the world of cryptocurrencies in general, don’t forget to give the Delta Exchange blog a visit!