Ichimoku Cloud Trading Strategy: A Complete Guide

Did you know that approximately two-thirds of day traders use a daily chart to help trade?

Trading can be a difficult and confusing process, especially if you’re just starting. It’s easy to feel overwhelmed when you’re first starting in the world of trading. There are so many different strategies and techniques to learn, and it can be hard to know where to start.

The Ichimoku Cloud is a powerful tool that everyday traders should use. Keep reading because this guide will teach you everything you need to know about this strategy, including how to use it for maximum profit.

What Is the Ichimoku Cloud Trading Strategy?

The Ichimoku Cloud, or Kumo as it is sometimes referred to, is a technical analysis trading system created by Goichi Hosoda in the 1930s. It uses candlestick charts to measure momentum and support/resistance levels and help day traders identify potential entry points for trades.

The Five Elements of the Ichimoku Cloud

The Ichimoku Cloud consists of five elements: Tenkan Line, Kijun Line, Chikou Span, Senkou Span A and B, and the Kumo itself. Let’s look at them now:

Tenkan Line

The Tenkan Line is an important technical indicator that can provide valuable information about the short-term strength and direction of a given market trend. This indicator is calculated by taking the average of the highest high and lowest low over nine days, and it can serve as a signal line for identifying potential support or resistance levels.

In addition, the Tenkan Line can also be used to generate buy or sell signals; for example, a crossover of the Tenkan Line above the Kijun Line are often considered bullish indicators, while a crossover of the Tenkan Line below the Kijun Line is typically seen as a bearish signal.

As such, religious observation of this indicator can be extremely helpful for active traders in making informed trading decisions.

Kijun Line

The Kijun Line is a technical indicator that is used to gauge the strength and direction of a trend. It is calculated by taking the average of the highest high and the lowest low over the past 26 periods. This line acts as a reference point for determining whether prices are in an uptrend or a downtrend.

When prices move above the Kijun Line, it is generally indicative of an uptrend. Conversely, when prices move below this level, it is often indicative of a downtrend. The Kijun Line can therefore be a useful tool for traders who are looking to identify potential trading opportunities.

Chikou Span

The Chikou Span is a technical indicator that can be used to identify potential areas of support or resistance. The span is plotted 26 periods back from the current price, and if the current price is trading above the Chikou Span, it could be an indication of an uptrend.

Similarly, if the current price is trading below the Chikou Span, it could be an indication of a downtrend. The Chikou Span can thus be a useful tool for identifying potential trend reversals.

However, it is important to note that the span is not a perfect predictor of trend reversals, and as such, should be used in conjunction with other indicators.

Senkou Span A and B

The Senkou Span A and B make up the core of the Ichimoku Cloud, which is a significant support/resistance area. These lines are plotted 26 periods ahead of the current price, and they help to identify whether prices are in a strong trend or a range-bound market.

The cloud acts as a key level of support or resistance, and a break above or below the cloud can signal a change in market direction. The Senkou lines can also be used to identify potential areas of support and resistance, as well as potential entry and exit points.

In general, the Senkou Span A should be above the Senkou Span B if prices are in an uptrend, and vice versa for a downtrend. When prices are range-bound, the two lines will crisscross each other.

By understanding how the Senkou Span A and B work, traders can gain a better understanding of market direction and where prices are likely to head next.

How Day Traders Can Use the Ichimoku Cloud

There are many ways day traders use the Ichimoku cloud. Let’s look at them in more detail:

Entry Points

The Ichimoku cloud is a technical indicator that can be used to identify potential trade entry points. The cloud is created by plotting two moving averages, one fast and one slow, and then shading the area between them.

The fast-moving average is typically set to 9 periods, while the slow-moving average is set to 26 periods. When prices are above the cloud, it is considered to be bullish, while when prices are below the cloud, it is considered to be bearish.

Day traders will often look for trades when prices move above or below the cloud, as this indicates a change in market sentiment. The Ichimoku cloud can also be used to identify potential support and resistance areas.

The cloud acts as a significant support/resistance area, and day traders will often buy or sell when prices move above or below the cloud. As such, the Ichimoku cloud can be a valuable tool for identifying potential trade entry points.

Stop-Loss/ Take Profit Levels

Day traders also use the Tenkan and Kijun lines as key support and resistance levels for setting stop-loss and take-profit orders. If prices move above the Tenkan line, it could be an indication that prices are in an uptrend.

Day traders may set their stop-loss order slightly below this level to protect against any potential losses. Likewise, if prices move below the Kijun line, it could be an indication that prices are in a downtrend.

Day traders may set their take-profit order slightly above this level to protect against any potential losses.

Trend Strength

The Ichimoku cloud is a popular technical indicator that can be used to measure the strength of a trend. If prices break through the cloud and remain above or below it for some time, it could be an indication that the trend is strong.

In contrast, if prices move back inside the cloud after breaking out, it could be an indication that the trend is weakening and there may not be much follow-through on the current move. The Ichimoku cloud can therefore be a useful tool for traders who are trying to gauge the strength of a trend.

The Benefits of the Ichimoku Cloud

Now that we understand the basics of the Ichimoku cloud and how day traders can use it, let’s look at some of the main benefits:

1. Easy to Use

Despite its complex appearance, the Ichimoku Cloud is quite easy to interpret. The key elements of the indicator are the nine moving averages, which are used to assess market sentiment.

The Ichimoku Cloud can be applied to any time frame, making it a valuable tool for both short-term and long-term traders. While there is no perfect way to use the Ichimoku Cloud, many traders find it helpful to use it in conjunction with other technical indicators.

When used correctly, the Ichimoku Cloud can be an invaluable tool for identifying trading opportunities.

2. Fast Identification of Trends

A cloud is a powerful tool for trend identification. By combining readings from multiple time frames, the cloud can quickly and accurately identify trends.

This is especially useful for long-term trend identification, as it can help to smooth out fluctuations that may occur over shorter periods. In addition, the cloud can also help to identify new trends as they emerge.

By constantly monitorings large amounts of complex data, the cloud can quickly spot new patterns and trends that may otherwise go unnoticed. As a result, the cloud can be an invaluable tool for trend identification.

3. Support/Resistance Levels

As a day trader, it’s important to have a clear understanding of support and resistance levels. These levels can provide key information about potential entry and exit points for trades.

A cloud is a valuable tool for identifying these levels. By studying the cloud, day traders can get a better sense of where prices are likely to find support or resistance.

This can help them to set stop-loss/take-profit orders or enter trades with more confidence. With the right approach, the cloud can be a valuable ally for any day trader.

4. Momentum Gauging

The cloud is one of the most important tools in the Ichimoku system, and it can be used in a variety of ways. One of the most important is gauging momentum.

By identifying potential entry points with the Tenkan and Kijun lines, the cloud helps to assess market sentiment and make informed trading decisions.

Try the Ichimoku Cloud Today

As you can see, there are many benefits to using the Ichimoku Cloud. And despite what you may think, it’s easier to implement than you may have thought.

When it comes to day trading, we always recommend using a custom indicator, as it can help you make the most of your investments. Indicators from NinjaTrader can be set up to help you streamline your investment process. This will help you spot opportunities as soon as they arise.

When it comes to custom indicators, NinjaTrader is one of the most trusted brands you can get. With over 12 years of experience in the industry, NinjaTrader custom indicators are widely regarded as the best charting platform out there.

Looking to get started? Visit our website for the latest software from NinjaTrader.

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