When we first applied the Ichimoku Cloud indicator to our technical charts, it didn’t look easy due to its many components. However, once you grasp its features and how to use it, the Ichimoku cloud can be beneficial in identifying trends, resistances, and supports.
Technical indicators like the Ichimoku Cloud provide information about the strength and direction of price trends, volatility, support, resistance, and possible price reversals. We can therefore call this indicator an all-in-one indicator.
Why is the Ichimoku cloud indicator so important?
Looking at this indicator, we can quickly determine the stock’s price movement direction. Prices above the Cloud indicate that the price is moving upward, and prices below the Cloud suggest that the price is moving downward.
A higher Leading Span A over a higher Leading Span B suggests an uptrend, and a green area between the lines indicates it. A falling Leading Span A confirms the downtrend when it falls below the Leading Span A. The space between the red lines is guaranteed when it falls below the Leading Span A.
It is common for traders to use the Cloud to find support and resistance levels. Using this indicator, you can project support and resistance levels into the future.
Using the Ichimoku indicator for trading:
In light of this knowledge, let’s review some bullish and bearish strategies that can be used with Ichimoku:
Trading strategy for bulls:
The following criteria should be followed when analyzing Ichimoku cloud indicators to determine if the prices are on an upward trend:
Criteria for uptrend:
- The price should be above the Tenken price, and the tenkun price should be above the kijun price.
- Both Tenken and Kijun should be moving upward in line with the price movement.
- There shouldn’t be too much difference between Kijun and the price.
- A bullish Kumo should be expected in the future
- A price above Kumo is necessary.
Trading strategy for bears
One should follow these Ichimoku cloud indicator criteria to determine whether the price is in a downtrend:
Criteria for downtrend:
- Price should be below Tenken and Tenkun below kijun.
- With prices declining, Tenken and Kijun should also move downward.
- There shouldn’t be too much difference between Kijun and the price.
- Kumo will likely turn bearish in the future
- It’s necessary to keep prices below Kumo.
Limitations of Using the Ichimoku Cloud :
Ichimoku Clouds have some limitations, as given below:
- It is difficult for traders to analyze the stock using this indicator due to its many components.
- Two of the plotted data points are based on historical data, whereas it’s based on future data.
- If the price remains above and below for an extended period, the Cloud may become irrelevant for a more extended time.
Should Newbie Traders use the Ichimoku Cloud?
The indicator is a bit challenging for a newbie. It is therefore not recommended for them. In addition, Ichimoku cloud indicator may not yet be fully understood by those who don’t yet understand the setup and rules required to use it. Candlesticks and one or two indicators may suffice. However, understanding the volatility of the market and how charts work is the first step towards becoming a successful trader.
