Ichimoku May Appear Complex, but the Kumo Cloud Can Stand on its Own

Forex traders are almost always looking for a new and better indicator, as if a new tool would change their trading experience over night. Innovation and adapting to changing market conditions, however, are the hallmarks of being a consistent and effective trader. Checking out new approaches for interpreting market signals falls into this category. Hoping that a “Holy Grail” will appear, however, is not realistic thinking.

The Ichimoku trading system is relatively new on the trading scene, developed by traders in Japan back in the sixties. This approach was unique in that it attempted to combine several indicator formulas to produce “one view”, the literal translation of its Japanese name. It became popular in commodities and futures markets, but soon migrated to currencies, as well. Today, several market commentaries in Asia have made it a practice to refer to the positioning of the Kumo Cloud, its most predominant feature.

Background Material on the Ichimoku Trading System

The Ichimoku indicator is available on most trading platforms today, a sign of its growing popularity. On the ever popular Metatrader4 platform, it is listed as an “Oscillator”, that category of quantitative methods designed to signal overbought and oversold conditions. This system can be visually intimidating to the beginner, but a wealth of material exists explaining the effectiveness of this tool and how its various components interact. Below is an explanatory chart.

Ichimoku pic 1

Here is a brief summary for each of the noted components:

  • Kumo Cloud: These areas depict support and resistance, derived from previous pricing data. The borders of an “Up” Cloud are known as Senkou Spans A and B. Key alerts occur when candlesticks exit the “cloud”, various lines enter or pass through the designated regions, or when the cloud changes color;
  • Tenkan-sen and Kijun-sen: These lines, similar to moving averages, are calculated from previous highs and lows over 9 and 26 periods, respectively. The “Green” line, or Tenkan-sen, is the quicker of the two, and its intersections are key trading signals, while its slope tends to measure momentum;
  • Chinkou-span: This line measures market sentiment, based on current closing prices, but is moved backward typically 26 time periods. Its position relative to pricing data indicates if Sellers or Buyers are dominating the action, while the cloud’s position may portend resistance if it enters the picture.

Ichimoku Advantages for a Currency Trader

For traders that are more accustomed to the quirks of their favorite indicators, the Ichimoku system, complete with four indicators designed to act in an integrated fashion, may be too much to swallow at one time. Should you jettison what you know for an entirely different system and then have to live through the learning-curve experience all over again?

The answer to this question comes down to your individual personality and whether you accept freely new ideas that you have yet to test or gain confidence in their application. Many traders, however, have chosen another route that you might consider. They incorporate the Kumo Cloud alone in their platform set up screen and rely on it as just one more piece of information to solidify their interpretation of market behavior. Let’s look at an example to drive home this point:

Ichimoku pic 2

The Ichimoku components tend to work best at longer timeframes. Weekly pricing behavior for the “EUR/USD” currency pair is depicted above, but you need not go this long for effective use of the Cloud. The long-term trend has been downward for the Euro, as signaled by the Kumo Cloud’s presentation of resistance and support. Elliott impulse and reversal waves are in clear view, but the road ahead is in doubt, since the Euro has not been able to forcefully penetrate the cloud or the 38.2% Fibonacci line, designated by the green oval and circles.

When the Senkou Spans (the cloud borders) cross, it is a signal that a change in direction is imminent. One must remember, however, that the Cloud is moved 26 positions forward, such that the signal applies back in time. Traders tend to use this cross as confirmation of other signals, as well. The most recent cross was a signal for the “B-to-C” upswing. The Cloud now appears to be contracting again, and when coupled with the apparent “Head-and-Shoulders” formation in progress, the odds seem to favor another downward move.

Concluding Remarks

The Kumo Cloud has been slow in coming to the West, primarily due to translation delays, but a wealth of explanatory material now exists on the Internet. The entire Ichimoku Trading System may seem overly complex, but the Kumo Cloud can supplement other trading strategies on a standalone basis. Adding the Cloud to your repertoire may be the only boost you need to achieve more gains.

Further reading:

More information on the Ichimoku Indicator.

A simple trading system based on the Ichimoku Indicator.

All Forex Indicator articles.

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