Updated - September 2024, AtoZ Markets - The Ichimoku Trading strategy is the most advanced and feature-rich tool that I have made use of in my trading career. It gives a simple, clear picture of the current market trends, support and resistance levels as well as momentum, allowing me to make better decisions at a glance.
Much to my experience, the Ichimoku Trading strategy will work better when the market is going on a trend in which it can give clearer signals. This is simply because Ichimoku has a lot of information in one chart; I avoided packing my charts with indicators as I kept the main picture in mind. This tool has contributed to enhancing my trading performance to the next level with regard to accuracy and consistency.
What is the Ichimoku Cloud?
Ichimoku cloud is a tool that any trader would be interested in, particularly in determining the direction of the market: to go up, down, or sideways. This tool has its roots in Japan and it means that you can see a lot of details in the smallest amount of time as it is a ‘one glance equilibrium chart’ as the name suggests.
The formation of the Ichimoku Cloud is divided into five major components, which are the powerful tools which are Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B, and Chikou Span. These parts come together and form what is referred to as the ‘cloud’ which is the color-filled region that explains whether a given market is likely to be on a bullish or bearish trend. This too diagram also assists the traders in predicting the probable resistance or support zones of prices.
All the elements of the Ichimoku Cloud have an impact on how the traders perceive the market in a plain manner and therefore, there is no need to apply too many other instruments.
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Understanding Each Ichimoku Cloud Component
The Ichimoku Cloud includes five components, which provide details that help each trader to fill in the gaps in the market. Despite this functionality, each one is focused on something different, such as determining the tendency of prices and predicting potential turning points.
Tenkan-sen (Conversion Line)
The Tenkan-sen reflects the current short-term tendency of the market. It considers the highest and lowest prices over the previous 9 periods (e.g. day or hour). It computes the mean value of the highest and the lowest price figures by taking the sum and dividing it by 2. Indicating the market trend, the line base rises or falls thankfully. Kijun-sen is a line that a trader applies to understand the current activity in the market.
Kijun-sen (Base Line)
The Kijun-sen represents the trend in medium terms. It functions the same as the Tenkan-sen only that this one takes into consideration thirty-six periods instead of the nine periods. It is a line that assists traders in detecting the levels of hope (levels under which price drops) and fear (prices where prices increase). So when the Tenkan-sen goes back and breaks the Kijun-Sen from above, it means time to buy, and when it goes below the Kijun expenses, then it usually means time to sell.
Senkou Span A (Leading Span A)
Senkou Span A is one of the lines that form the cloud. This is done by taking the average of the Tenkan-sen and Kijun-sen lines and then shifting that line forward in time by 26 periods. This line is useful in identifying possible levels of price support or resistance since that level will be tested in the future. Then again, when the price is above Senkou Span A, it could further provide a support line and when below, it could turn into a resistance line.
Senkou Span B (Leading Span B)
Senkou Span B is the second line that helps make up the cloud. It does this by taking the highest high and lowest low within the last 52 periods and averaging it out. Just like Senkou Span A, it is also shifted to include the next 26 periods. When both Senkou Span line thickens an orange cloud between them, it tells us that the market is highly volatile or undergoing fast changes. When the cloud is thinner, it tells us that the market is stable. These two lines assist the traders in ascertaining areas where pricing may reverse or learn to be hesitant.
The Chikou Span
Often referred to as the lagging line, the Chikou Span is also usually regarded as the present price, yet it bears values that are 26 periods in the past. This line assists traders in understanding whether the present price is in a higher range than the one in the earlier period of time. When the Chikou Span is above the current price, it indicates that the market is bullish; and when it is lower than the current price, it indicates that the market is bearish. Extra confirmation of the other cloud signals is also obtained from this line. If you are new to the term Bullish, please read our guide on understanding the bullish market and its key indicators.
As much as the different perspectives provided by the various areas of the Ichimoku Cloud did, it seems that the areas themselves are interdependent so as to offer the traders coherent information as to the current state of the market and what could be in the future.
How to Use Ichimoku Cloud in Forex Trading
The Ichimoku Cloud helps traders answer questions such as when prices are likely to rise or fall, and whether it is a good time to buy or even to sell the market. It is a type of analytical tool which indicates the size of the market, whether the prices are active or stable, and assists in determining pivot or reversal swing point levels. Here’s how you can use it in forex trading.
Identifying The Trend Direction Of The Market
In a nutshell, the Cloud will always assist you in knowing if the market is in a bullish trend, a bearish trend, or a sideways trend. When the price is above the cloud, this shows that there is an upward trend and so most likely the prices will be increasing. If the price is below the cloud, this indicates that there is a downward movement and thus the prices are decreasing. The market is going sideways when the price is in the cloud and most of the time, traders wait for the price to emerge from the cloud in anticipation of rising or falling price activity.
Cloud Thickness and Volatility
The density of the cloud indicates the level of activity in the market. A dense cloud indicates high volatility in the market. No more activity is expected regarding the market therefore, a thin cloud is present. Thin clouds are processed more by market participants as clouds represent market anticipation, and the easier it will be to know where the X is going. In a few cases, however, a thick cloud can also indicate that a strong trend is in progress, especially when the price is considerably above the cloud or below it.
Taking the Chikou Span for Confirmation
Chikou Span is today’s price overturned to 26 periods ago. This acts as a confirmation of the price behavior. It’s easy to see when the Chikou Span is higher than the price 26 periods ago and that is an uptrend. If it is below the price from 26 periods ago it confirms a downtrend. When evaluating the previous price action, traders utilize this line to confirm the validity of other Ichimoku Cloud signals before executing a trade.
Support and Resistance Levels
In addition to the insights from the price action guide, the Ichimoku Cloud also assists the trader in spotting strong support and resistance levels. For example, when the price is above the cloud, the upper edge of the cloud will often create a level upon which the price will bounce upwards. On the other hand, when the price is below the cloud, the lower edge of the cloud will serve as a level at which the price will no longer rise further. Such levels are very critical in deciding where the trader should enter or exit from the markets.
With the aid of the Ichimoku Cloud, the trader enhances their comprehension of the market and, consequently, is in a position to time their buy or sell with proper relevance.
Step-by-Step Guide to Ichimoku Cloud Trading Strategy
In this strategy, we will show you the buy trading setup. You can apply this strategy to the sell setup also.
Step 1: First look for the price strike above the Ichimoku cloud. It's because it's a bullish sign and possibly the start of another up-trend. The Ichimoku cloud was made to highlight the support and resistance levels. So, when the price breaks above the cloud it's the beginning of the up-trend, and when the price breaks below the cloud its the beginning of down-trend.
Step 2: The price breakout over the Cloud needs is trailed by the intersection of the Tenkan Line over the Kijun Line. When these two conditions are completed, we can hope to enter a buy trade. The Ichimoku Cloud indicator is an exceptional depth technical indicator. The marker is even utilized as a moving average intersect technique.
Step 3: Generally, when the price is trading above the Cloud, then the Ichimoku strategy is taken with long trades. Before pulling up the lock on a trade, we conjoined an extra factor of copulation. Therefore, we buy at the opening of the next candle after the crossover.
Step 4: Beneath the low of the breakout candle, is the ideal hideout location for our protective stop loss. This trading technique executes two important things. Examples are below:
- It lowers the risk of losing big money cabalistically.
- It is helpful for us to trade with the market order flow.
As it's a swing trading strategy we’re attempting to seize as many as feasible from this new trend. Once a new crossover occurs in the inverse direction then we’ll be trying to ramble our stop loss level beneath the Cloud or exit the position.
Step 5: We just need one easy condition to be happy with our take-profit method. At the point when the Tenkan line crosses underneath the Kijun line, we need to take profit and exit our trade. On the other hand, you can hold up until the price breaks under the Cloud. However, this implies risking losing a few parts of your gains. To acquire, now and then you must be happy to lose a few.
Popular Ichimoku Cloud Trading Strategies - My Personal Experience
I have to admit the Ichimoku Cloud is one of the indicators I use the most in forex trading, and I have also been able to profit a lot using the breakout strategy and the Tenkan/Kijun cross strategy. These strategies have proven to be very beneficial in identifying strong trending markets and improving the quality of my trades over the different periods. In the following paragraphs, I will give an account of how these strategies worked for me in practice and provide some figures to show how efficient the strategies were.
Breakout Strategy
Breakout strategy including false breakout is quite efficient when it comes to going with the new trend from the very start of its entry into the market. To illustrate, in a trade where I entered on the EUR/USD pair, for instance, the price broke the cloud, implying a change in the direction of the market upwards. For the following two weeks, such trades made me over 150 pips. I had, on the other hand, risked 40 pips in losses by placing a stop loss which translated to a risk-to-reward ratio of 1:3.
I have observed that the entry after the breakout is stronger in trends if the thin cloud precedes the breakout. In another trade of GBP/JPY, again a thin cloud breakout provided us 200 pips in few days on the higher side. Following this strategy, I have been successful in achieving 65% accuracy for breakout takedown
Tenkan/Kijun Cross Strategy
This is another technique I applied to the trades, the Tenkan/Kijun cross strategy. In a trade in USD/ JPY, I was able to make a 180 pip gain in a week when the Tenkan-sen moved above the Kijun-sen.
This strategy works best when the cross occurs above or below the cloud. From the technical and fundamental analysis of most of my trades executed over the last year, I discovered that around 70% of the trades I made after a bullish cross-formation above the cloud were profitable. An example is in one of the trades where there was a bullish cross on the AUD/USD, and for several days after that, the price continued increasing, allowing me to make 120 pips.
I believe both approaches have increased my success rate in risk management and trade outcomes, and adding these techniques to other indicators has proven them to be even more effective.
Best Timeframes and Markets for Ichimoku Cloud
It is safe to say that in my case and almost in every case, the time frame you select for applying the Ichimoku Cloud has a lot of bearing on how successful the strategy is. The Ichimoku Cloud works well on every time horizon, however, I realized that it will give good results mostly in trending markets whether you are day trading or swing trading.
Practicing Day Trading
In my case, when I am day trading, I prefer to use smaller duration or shorter time frames such as the M5 or M15 charts. This is because these shorter time frames help me to cut edge within the market and ride on quick trends. For example, in day trading on the EUR/USD currency pair and using the M15 chart, I made a breakout of the cloud during the day and captured 50 pips move in a couple of hours.
Often, the day trader will have to act very quickly and they will find the Ichimoku cloud of assistance in identifying the trend very quickly. However, I have seen, during very volatile days, there are chances that on shorter time frames there will be many false signals therefore the RSI and, if applicable, MACD will be even more useful.
Operation in a Swing Trade Strategy
In most of cases, I trade in H4 (4 hours) or all the Daily charts when it comes to the swing trading. These time horizons allow me to catch bigger moves and to keep the positions for a few days or even weeks. Among all my trades with the Ichimoku Cloud, the best one was done on the GBP/JPY daily chart, where I entered a two-week-long position after a strong break-out above the cloud and made more than 300 pips profit.
In my experience, the best results with the Ichimoku Cloud have been achieved on longer timeframes since the overall market trend is easier to see without the distracting intra-day noise. This is a benefit that swing traders can use to enter a trend earlier and stay in such trends longer with the possibility of attaining more profits.
Markets Suitable for Ichimoku Cloud
In terms of markets, forex particularly major pairs such as the EUR/USD, GBP/USD, and USD/JPY, are the markets where I have had the best experience using the Ichimoku Cloud. These pairs usually have good trending qualities, and get fewer false signals when trading compared to other unsupervised liquidity or higher volatility markets.
The Ichimoku Cloud worked well for me until I came across consolidating or otherwise very whipsawing markets. So as much as possible I do not use trades when the market is flat since the signals are not dependable and the cloud offers numerous mixed findings. In comparison to its efficiency in sideways markets – this is one of the most successful tools that I believe in when used in non-sideway markets.
My advice: I always use Ichimoku Clouds on higher time frames for swings and on lower time frames for quick coverage when there are dynamics against the majority. Some readers might recall a few articles on Ichimoku. In the next section, I will speak about the enhancement of the system through the incorporation of additional instruments with the Ichimoku Kinko Hyo.
| Trading Style | Timeframe | Best Market | Average Pips Gained | Holding Period |
|---|---|---|---|---|
| Day Trading | M5 (5-minute) | EUR/USD | 50 | Few Hours |
| Day Trading | M15 (15-minute) | GBP/USD | 75 | Few Hours |
| Swing Trading | H4 (4-hour) | GBP/JPY | 300 | Few Days |
| Swing Trading | Daily | USD/JPY | 150 | 1-2 Weeks |
In this table, I’ve summarized my own personal experience from the use of the Ichimoku Cloud within the various markets and time frames. Personally, I think that for day trading, the best results can be achieved with shorter time frames such as M5 and M15, whereas H4 and Daily time frames are more appropriate for swing trading. The Ichimoku Cloud is particularly useful for entering the market and catching trends in currency pairs such as EUR/USD or GBP/JPY where high liquidity offers more opportunities for making considerable pip profits. Open trades can last from a couple of hours in the case of day trading to a couple of days, weeks, or even longer in the case of swing trading.
Combining Ichimoku with Other Indicators
The Ichimoku Cloud may function well independently; however, I appreciate its use with other tools as it enhances my trades further. Indicators such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) have enabled me to avoid poor trades in addition to validating the right ones, particularly in indecisive market conditions.
Using RSI with Ichimoku Cloud
Through this usage, however, I have come to learn that RSI has some limitations such as the following when used in conjunction with Ichimoku Cloud. The RSI reveals whether or not an asset is either overbought or oversold. I mostly use the RSIs as a confirmation for the Ichimoku Cloud signals especially for short trades. Several times, if the price crosses above the cloud, which should be bullish, I get worried and the longer the prices go up while the RSIs stay high, I start preparing for a fall. This has protected me from taking poor trades in numerous instances.
For instance, once I was trading on a 15-minute chart for EUR/USD and the price went above the cloud. The RSI however pointed to an overbought market, returning a value of 75. I chose not to enter the trade and instead, I sat that one out, and almost immediately after entry, the price fell; saving me 30 pips of loss. The incorporation of RSI together with Ichimoku has been proved beneficial for my win rate performance where a shift in market direction does happen fast.
Using MACD with Ichimoku Cloud
Every now and then, I assess trends using the MACD. Using MACD shows the relation of two moving averages and helps me know whether the trend is strong. To illustrate, once the Tenkan-sen crosses above Kijun-sen and the MACD also shows a positive cross, I know it is time to buy.
In the daily chart, trading the GBP/JPY pair, I noticed a bullish Tenkan/Kijun crossover but waited for the MACD to confirm the trend. The moment both Ichimoku Cloud and MACD confirmed the alignment’s expectation, I executed the trade and closed the load with 150 pips gain within a week. These two tools have been a blessing in disguise as I have made successful trades and cut back on false signals.
Avoiding Too Many Indicators
I have also come to understand that it is dangerous to look at too many indicators at the same time. I believe it is possible to use a single or maybe two tools like the RSI or the MACD alongside the Ichimoku Cloud and get good signals. Doing otherwise will lead to mixed signals and that can cause a lot of confusion. For me, the fewer the tools the better especially in fast-moving markets like forex.
Using the Ichimoku Cloud with these other indicators has given me much better results in my trading.
Pros & Cons of the Ichimoku Cloud
Pros
- Comprehensive Tool: Combines trend, support, resistance, and momentum in one indicator.
- Clear Trend Identification: Helps easily spot uptrends, downtrends, or sideways markets.
- Support and Resistance Levels: The cloud provides clear visual support and resistance zones.
- Effective in Trending Markets: Works well in markets with strong trends.
Cons
- Ineffective in Sideways Markets: Gives unreliable signals during flat or choppy markets.
- Clutters Charts: Takes up significant space on the chart, making it look crowded.
How to Set Up the Ichimoku Cloud in MetaTrader 4
Setting up the Ichimoku Cloud in MetaTrader 4 (MT4) is easy and lets you use this tool to help with your trading. Follow these simple steps to add the Ichimoku Cloud to your chart.
Steps to Set Up the Ichimoku Cloud:
- Open MetaTrader 4
Firstly, launch the MT4 platform and choose the chart for the currency pair you want to trade (for example, EUR/USD or GBP/JPY). - Go to Indicators
On the top of the screen, select Insert > Indicators > Trend and then select the Ichimoku Kinko Hyo from the list. - Set the Settings
A window will pop up with settings. The default settings are:- Tenkan-sen: 9 periods
- Kijun-sen: 26 periods
- Senkou Span B: 52 periods You can leave these numbers as they are because they work effectively for the majority of the trades. But if you want, you may tweak them based on your trading style.
- Change the Colors
In the same window, you can modify the colors and width of the lines to make them more conspicuous. For instance, you may decide to implement different colors for Senkou Span A and for Senkou Span B to help the cloud differentiate itself better. - Apply the Indicator
Once you’ve made any changes, click OK. You should now be able to see the Ichimoku Cloud displayed on your chart and also view the five sections which are Tenkan-sen, Kijun-sen, Kanou Span A, Kanou Span B, and Chikou Span.
How to Read the Ichimoku Cloud on MT4
- Price above the cloud: The market is going up (uptrend).
- Price below the cloud: The market is going down (downtrend).
- Price inside the cloud: The market is moving sideways (no clear direction).
- Tenkan-sen/Kijun-sen cross: This cross gives buy or sell signals, depending on the direction of the cross.
Tips for Using Ichimoku on MT4
- The default settings are good for most trades, so you don’t need to change them.
- Pick colors that help you easily see the lines and clouds on the chart.
- You can also use the Ichimoku Cloud with other tools like RSI or MACD to confirm your trades.
Now your Ichimoku Cloud is ready to use on MetaTrader 4!
Conclusion
With the help of the Ichimoku trading strategy, traders can analyze trends, various support, and resistance points, and momentum with just one chart. It is what I have been using in markets that are primarily trending up or down. It aids traders in determining the right places to either open or close positions. The use of the Ichimoku Cloud is very efficient whether you trade for a few hours or hold on to your trade for a very long time; it is applicable on various time frames.
I must say, it is quite complicated for most beginners, but once you get hold of the concept it gets easier. For those who trade in mostly sideways movement, it is likely not going to prove beneficial, but tips the scale in favor of the day traders.
Employing it along with other tools such as the RSI and MACD improves its effectiveness even more. This, however, is not the case with me, since it has been fundamentally of great use to me, and I believe it is the same with many other traders.
Should you trade with Ichimoku Cloud trading strategies on your own at all?
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Ichimoku Trading Strategy FAQs
1. What is the Ichimoku trading strategy?
The Ichimoku trading strategy is a tool associated with technical analysis that aids traders in determining the trends, levels of support and resistance in the markets, and the particulars of market momentum. It encompasses five principal elements like the cloud so as to give an almost complete perspective about the market status.
2. How do you read the Ichimoku Cloud?
Reading the Ichimoku Cloud has more to do with the price in relation to the cloud. If price is above the cloud, there is an upward movement in prices. If price is below the cloud, it indicates a drop in prices. The thickness of the cloud coveys the movement of price.
3. What are the key components of the Ichimoku trading strategy?
To apply this trading strategy, five main components are taken into consideration; these are: Tenkan-sen (also called the Conversion Line), Kijun-sen (otherwise known as base line), Senkou Span A and B (which also merges to create the cloud), and the Chikou Span (Lagging Line). The foregoing elements come together and a trading strategy is fully developed.
4. Is the Ichimoku Cloud strategy good for beginners?
The use of the Ichimoku Cloud, in particular, can be quite challenging when targeting beginner-level as it encompasses and deals with many aspects, however, with time, it has proved to be quite easy to utilize. It’s a very effective use of the tool after traders appreciate the signals generated and are able to read them well.
5. What are the best time frames for applying the Ichimoku trading strategy?
The Ichimoku trading strategy proves all-inclusive, working on any trading time frame however the most favorable conditions are within a trending market. For day trading the sub timeframes such as M5 and M15 are limited to day traders and almost non-used by swing traders, on the contrary H4 and daily charts are mostly preferred by swing traders.