How To Trade Using Ichimoku Clouds

How To Trade Using Ichimoku Clouds

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Red and Green Clouds with Japanese Characters.

Indicators are a significant part of many successful traders’ strategies, alongside the appropriate risk management tools that help traders gain comprehensive price trend insights. The issue lies in becoming consistently profitable in trading, which is quite rare. One main problem is everyone is using the same tools, and when that happens the edge these tools once had dissipated.

Additionally, not all indicators are equal. There are various trading indicator types, including lagging and leading indicators. Lagging indicators use past trends to indicate momentum while leading indicators are forecast signals predicting future price movements.

This article reintroduces a long-forgotten indicator, the Ichimoku Cloud, which predicts future price movements. The Ichimoku Clouds are visually appealing due to having colorful and clear buy and sell signals. Ichimoku Clouds are in a class of their own regarding day trading. This makes it ideal for trading markets such as Stocks, Forex, Cryptocurrency (Dogecoin, Ethereum, Bitcoin), and Futures. Look at the example shown, where I show FuboTV ($FUBO), on the 4-hour chart, where the Ichimoku clouds clearly and profitably indicate both a buy signal and a sell signal.

ichimoku clouds 4 hour chart fubotv bullish bearish

Developed by a Japanese journalist, Goichi Hosoda, in the early 1930s, the Ichimoku indicator underwent 30 years of technique perfection before its eventual release to the general public in the late 1960s. The Ichimoku Cloud originates from Japan and has, ever since its release, grown popular amongst the Japanese.

A huge part of what you should take away from this article as we delve into the details below is the understanding of this unique indicator and work on making it your own by changing certain settings, combining it with other indicators, or some other innovative way to gain an edge over everyone else. For example, it has inspired a trader named Ripster who evolved in the indicator into the “EMA Cloud”. 

How to Use Ichimoku Cloud Indicator to Trade

ichimoku cloud leading span b a

Although the Ichimoku indicator contains five (5) different lines, it is easy to read and interpret the graph. Check out the image above for a detailed visual breakdown of the indicator with a detailed description found in Trading Strategy Guides (where the above chart was sourced from).

Identifying both Leading Span B and Leading Span A causes the “cloud:” component of the trading graph to be shaded in. When Leading Span B is higher than Leading Span A, it reveals an increase in price momentum. The chart will be shaded in green whenever this happens. This is usually when the buying should occur as well and short-covering should commence.

On the contrary, if Leading Span A is higher than Leading Span B, the price momentum is decreasing. This occurrence is typically shaded red on the charts.  This is where you would sell or open a short entry.

Traders can determine the market’s direction by examining the cloud colors. Which makes things simple especially with the frantic stress of day-trading.

To summarize here are the two fundamental interpretations of the Ichimoku Charts

  • A bullish trend is established whenever the price is higher than the cloud.
  • A bearish trend is formed whenever the price is below the cloud.


How to Use the Ichimoku Indicator for Day Trading.

Day traders can intuitively identify buy-sell signals using the Ichimoku Cloud indicator to day trade with the following buy and sell signals

  •  Sell signals form when candlesticks break below the clouds
  •  A buy signal forms when a candlestick crosses above the clouds.

Using the 5-minute chart of the QQQ below, you can see a buy-and-sell trade strategy depending on whether the price is above or below the cloud. Obviously, a successful strategy needs practice, experience, and refinement to optimize your edge.

Ichimoku Cloud Buy Sell 5 minute chart QQQ

 There are five elements of the Ichimoku Cloud indicator that are listed below:

  • Tenkan Sen
  • Kijun Sen
  • Senkou Span A
  • Chikou Span
  • Senkou Span B
Tweaking these and iterating them can be a game-changer for your trading. Modifying them can reduce the noise and false buy and sell signals. You can see all five elements on the IBM chart courtesy of StockCharts. If you do indeed test the Ichimoku Clouds out, it’s strongly encouraged that you tweak and play with the settings of each of the five elements to reduce false signals and noise.
5 types of ichomoku clouds

Conclusion

Ichimoku Cloud indicator is different from other indicators used for technically analyzing the stock and the crypto market. If you find it challenging to identify true support and resistance levels, the Ichimoku indicator strategy outlined in this article should come in handy, as it provides clear and concise buy and sell signals.

Keep in mind much like Ripster made it his own into the EMA Cloud Indicator which is also covered on this site. I encourage eager learners to go out and tweak settings and refine their system. Invent other unique ways to make it your own to maximize your profits, and not end up being the 99% of day traders who end up failing.

One final tip is to evaluate the Ichimoku Cloud in various Markets, for example, DogeCoin, Forex, Ethereum, and Bitcoin you may find it more profitable in a certain market versus others. 

Looking for other unique indicators that are rarely used to help get that extra edge in the Crypto, Futures, and Stock Market? Check out my article on the ADX trend indicator, great for identifying securities that could potentially return 10x.

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