Ichimoku Cloud Indicator. Monster guide and trading strategies!


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Looking for a profitable Ichimoku strategy and the most comprehensive explanation of the Ichimoku Cloud indicator? Then you’ve come to the right place my friend.

In this ultimate Ichimoku guide I explain exactly how this Japanese indicator works and I’ll show you the most profitable Ichimoku strategies for traders and investors.

Use the table of contents below to easily navigate through this guide.

What is the Ichimoku Cloud?

The official name of the Ichimoku Cloud is Ichimoku Kinko Hyo and was invented by the Japanese journalist Goichi Hosoda.

Happy Ichimoku boss

Definition: The Ichimoku Cloud is a method for technical analysis, which is built on candlestick charts to predict future price movements.

The system was developed around 1930 by Goichi Hosoda who was known as Ichimoku Sanjin. Freely translated this means: “What a man sees from the mountain.”

It took him 30 years to perfect this technique before he made this method public in the late 1960s.

Ichimoku Cloud versus other indicators

Ichimoku Kinko Hyo means something like “chart equilibrium at a glance” or “snapshot of the balance”. It is a system with which the trend can be identified based moving averages.

And because the Ichimoku Cloud has more data points than a regular candlestick chart, you get a much better picture of the price action .

The big difference between regular moving averages and the Ichimoku Cloud is that the lines of the Ichimoku Cloud are plotted by always grabbing the center of the highs and lows. Instead of the open and close of a certain period.

Ichimoku is the most commonly used indicator in Japanese trading rooms.

What can you do with the Ichimoku Cloud?

Ichimoku is a method for technical analysis that measures the momentum of the market. The goal is to show market sentiment at a glance, based on the price compared to the Kumo Cloud .

In addition to the Cloud, Ichimoku uses more measuring points to paint a deeper and more understandable picture of the price action. The most important question is whether the price is in equilibrium (balance) or not.

Ichimoku also shows support and resistance of both the past, present and future. This makes it the only indicator that is both lagging and leading.

Furthermore, the Ichimoku Cloud is also used to generate buy and sell signals. This can be done in different ways and I will show you everything in this monster guide.

So in a nutshell Ichimoku combines the following:

  • Market sentiment
  • Momentum
  • Volatility
  • Support and resistance
  • Trading signals

You could say that the Ichimoku Cloud is every traders wet dream! 😉

Nice!

Why should you use the Ichimoku Cloud?

One of the most important things you should have as a trader or investor is discipline. Lack of discipline is one of the main reasons why 80% of traders lose money in the markets. And Ichimoku will help to ensure that you trade in a disciplined manner.

Patience

In addition, you must be patient as a trader. Another reason why most people fail. You have to wait for the right opportunities to be successful in trading.

The Ichimoku Cloud strategies that I will show you later have strict rules. If a buy or sell signal does not meet those rules, you do not open a trade. Simple! But again, you have to be patient and wait for the right moment to strike.

Ichimoku Cloud traders need patience
Ichimoku traders need patience

Many traders and investors are impatient and cannot wait to open the next trade. That is where things often go wrong. Ichimoku will help you with this… if you obey the rules.

Follow the rules

Ichimoku trading strategies are based on set rules. This allows you to (for the most part) eliminate the emotional side of trading. And if emotions are involved, it’s because you’re happy to see that your position is moving in the right direction and making a profit. 🙂

Ichimoku catches the big trends

Through the Ichimoku Cloud strategies that I will be sharing with you later, you will stay in positions that you would normally get out of earlier. Ichimoku also shows you when you have to get out, so that you can catch bigger trends and ride them out.

Ichimoku removes the doubt

Like I said; the rules of every Ichimoku strategy are fixed. So you no longer have to gamble or doubt yourself. If all the lights are green, then you get in. If not, you do nothing.

Create order in the chaos

You are always looking for specific rules and things that must happen before you open a trade.

So you create order in your trading. No more jumping in and out of positions like a headless chicken, but waiting for the right moment like a sniper.

Support, resistance and market sentiment

Through the Ichimoku Cloud you will spot support and resistance levels much more easily. In addition, you will always immediately see who is in control of the market. The bulls or the bears. For both the short, medium and long term.

Stand Alone System

Ichimoku is a standalone system. By this I mean that you don’t need anything else to trade. Stop loss, entries and take profits are all included. You therefore do not need any other indicators.

Easy to learn

It may seem a bit confusing in the beginning. But once you get the hang of it, it’s really a wonderful system. You just have to put some time and energy into it, like everything in life.

For which markets can I use Ichimoku?

Ichimoku works in all markets, instruments and assets.

  • Stocks
  • Indices
  • Forex
  • Commodities
  • Options
  • Futures
  • And even crypto

It also works on every time frame. So Ichimoku is also suitable for every type of trader or investor. However, the higher time frames such as the Daily and the 4 hour charts are more reliable.

The components of the Ichimoku Cloud

The Ichimoku Cloud is made up of different parts.

Ichimoku indicator components
Ichimoku indicator components

Once you have added the Ichimoku Cloud indicator to your chart, you will see something like the one above. This varies a bit per broker or the software you use. You can usually adjust the colors and line thickness to make it a little clearer.

Don’t be scared!

As I said, it looks more complicated than it is. This section might be a bit boring, but I think it’s important to know how an indicator works and that’s how you learn the terms I will use from now on.

These are the 6 components:

  • Tenkan Sen (blue line, also called the conversion line)
  • Kijun Sen (orange line, also called the base line)
  • Chikou Span (purple line, also called the lagging line)
  • Senkou Span A (green line on the edge of the Kumo Cloud)
  • Senkou Span B (red line on the edge of the Kumo Cloud)
  • Kumo Cloud (colored “cloud” in light pink and light green

You can forget about Senkou Span A and B after the explanation, because the Kumo Cloud itself is the most important. Once again; this information might be a little boring, but I want to show you how these parts are calculated and what they do.

We’ll start with Tenkan…

Tenkan Sen
Tenkan Sen

Tenkan Sen

Calculation: The highest high + the lowest low of the last 9 candles divided by 2.

  • Midpoint of the last 9 candles
  • Fastest of all calculations
  • Short-term sentiment, support and resistance and momentum
  • Used as a signal line together with the Kijun Sen for the TK crossover strategy

Up next is Kijun…

Kijun Sen
Kijun Sen

Kijun Sen

Calculation: The highest high + the lowest low of the last 26 candles divided by 2

  • Midpoint of the last 26 candles
  • Medium-term sentiment, support and resistance and momentum
  • Built-in trend line: Price crossing means possible change in the trend
  • Trailing stop loss: adapts to market volatility
  • Magnet for the price: price always comes back to the Kijun sooner or later
  • Used together with the Tenkan for the TK crossover strategy
  • Used for Kijun bounce strategy

Now let’s look at Chikou…

Chikou Span

Chikou Span

Calculation: The current price, but projected 26 candles backward on the chart.

  • One of the most important factors in determining whether you will enter a trade or not
  • Shows if price is trending or ranging
  • Chikou Span above the price is bullish
  • Below the price is bearish
  • Middle of price is undecided (range or consolidation)
  • Shows support and resistance from the past

The Kumo Cloud itself is made up of two moving parts…

Senkou Span A and B
Senkou Span A and B

Senkou Span A

Calculation: Tenkan + Kijun divided by 2, projected 26 candles in the future on the chart.

  • Midpoint of Tenkan and Kijun projected 26 candles forward
  • Forms the Kumo Cloud together with Senkou Span B
  • Together with Senou Span B it forms the Kumo Twist and sentiment in the future
  • Senkou Span A on top is bullish and bottom is bearish
  • Shows the long-term trend
  • Show long-term support and resistance
  • Measures the volatility
  • Is almost never flat, while Senkou Span B often is

Senkou Span B

Calculation: The highest high and the lowest low of the past 52 candles, divided by 2 and projected 26 candles in the future on the chart.

  • Slowest of all components
  • Forms the Kumo Cloud together with Senkou Span A
  • Together with Senkou Span A it forms the Kumo Twist and sentiment in the future
  • Senkou Span B on top is bearish and bottom is bullish
  • Forms a flat top or bottom of the cloud if price has not made a higher high or lower low in the last 52 candles

Let’s look at the cloud…

Ichimoku Kumo Cloud
Ichimoku Kumo Cloud

Kumo Cloud

  • Colored space between Senkou Span A and B
  • Price above Kumo is bullish sentiment
  • Under Kumo there is bearish sentiment
  • In the cloud is undecided (range, consolidation)
  • Shows current and future support and resistance
  • Thicker Kumo is more volatility and stronger support and resistance
  • Thinner Kumo is less volatility and weaker support and resistance
  • Every trend starts with a Kumo breakout

As mentioned, you can forget the Senkou Span A and B. The Kumo Cloud that they form together is the most important thing.

Ichimoku trading signals (minimum requirements)

Before you even consider openingen a position, you must always answer these questions…

Price compared to the Kumo Cloud

Price above the Kumo Cloud is bullish (buying signals) and price below the Kumo is bearish (selling signals ). If the price moves in the Kumo, there is no clear sentiment (range).

Kumo Cloud support levels
Kumo Cloud support levels

The top and bottom of the Cloud are strong support and resistance levels. If price moves above the Kumo Cloud, the top of the cloud acts as the first level of support and the bottom as the second level of support.

Kumo Cloud resistance levels
Kumo Cloud resistance levels

If price is below the Kumo Cloud, the bottom of the Cloud functions as level 1 resistance and the top as level 2 resistance.

Rule #1: If price is above the Cloud, we will only look for long positions (buy). If price is below the Cloud , we will only look for short positions (sell) .

Tenkan Sen vs Kijun Sen

Tenkan above Kijun is bullish and Tenkan below Kijun is bearish. Also, I recommend that you always keep an eye on the price position in relation to the Kijun. With rapid price movements, the space between price and the Kijun Sen line will become larger. The Kijun will then flatten.

Remember that the price always comes back to the Kijun sooner or later.

Chikou Span
Chikou Span

Chikou Span vs price and Kumo Cloud

Chikou Span above price is bullish and below price is bearish. For additional confirmation you can check if Chikou Span is under or above the Kumo Cloud.

If Chikou Span moves within price, there is no trend and the market is ranging. Chikou Span is the last confirmation before you open a position.

Next…

Kumo twist and Kumo Future
Kumo twist and Kumo Future

Kumo Future

Senkou Span A above B is a bullish future Senkou Span A below B is a bearish future. This indicates the future sentiment. You could also say; green cloud is positive, red cloud is negative.


Much respect that you have made it this far. This is pretty heavy shit, but that is also the reason that I feed it to you in bite-sized chunks. Not all chunks are equally tasty, but you do have to eat them all to get the maximum benefit from this later.


Strength of the Ichimoku signals

The Ichimoku method tries to place the odds in your favor. That is why we not only have look at Ichimoku signals themselves, but also the strength of those signals. The strength of a signal is determined by where the signal takes place.

There are 3 places where a signal can occur:

  • Above the Kumo Cloud = Bullish territory
  • In the Kumo Cloud = Neutral territory
  • Below the Kumo Cloud = Bearish territory
Strong bullish signal
Strong bullish signal

When a bullish signal occurs below the Cloud it’s a weak signal and if a bearish signal occurs above the Cloud, then that is also a weak signal.


This concludes the background story and explanation of the Ichimoku Cloud indicator. Now comes the fun part, namely the Ichimoku strategies. Grab an another cup of coffee and we’ll continue with the good stuff! 🙂


Ichimoku strategies

First of all I will give you an overview of the different Ichimoku trading strategies. After that I’ll walk you through them one by one.

  • TK Cross = Tenkan Sen crosses Kijun Sen from above or below
  • Kumo Breakout = Price breaks above or below through the Kumo Cloud
  • Kijun Bounce = Price bounces off the top or bottom of the Kijun

Ichimoku strategy #1: TK Cross

This is probably the most popular Ichimoku strategy, the TK Cross. This buy or sell signal is generated when the Tenkan Sen line crosses the Kijun Sen line. From above or from below.

When Tenkan crosses the Kijun from below it’s buy signal. If Tenkan crosses the Kijun from above, it’s a sell signal.

Note: be careful when opening a position if Kijun Sen is flat.

Remember, the strongest signals are generated when the price moves above (buy) or below (sell) the Cloud!

This Ichimoku Cloud strategy looks a bit like a moving average crossover strategy, but differs because the Tenkan and Kijun are calculated based on the highest high and lowest low over a certain period. Instead of the open and close as with the normal moving average.

This signal announces that the momentum is shifting and that there is a chance of a change in the trend. The signal is generated when the Tenkan crosses the Kijun.

As with any trend following system, the signals work best when there is a nice trend. It works less well in ranging markets that move sideways.

Personally, I have the most success with the TK Cross on the higher time frames, such as the H4 and Daily charts.

TK Cross trading rules

Below the trading rules for the TK Cross strategy.

Bullish setup (buy)

  1. Price above Kumo Cloud
  2. Positive Kumo Future / Twist
  3. Chikou Span above the price 26 candles back
  4. Entry: buy on close of the candle when Tenkan crosses the Kijun
  5. Stop loss: below the top or bottom of the Kumo or below the Kijun
  6. Take profit: at bearish TK cross or when a candle closes below the Kijun

Bearish setup (selling)

  1. Price below Kumo Cloud
  2. Negative Kumo Future / Twist
  3. Chikou Span below the price 26 candles back
  4. Entry: sell on close of the candle when Tenkan crosses the Kijun
  5. Stop loss: above the top or bottom of the Kumo or above the Kijun
  6. Take profit: at bullish TK cross or when a candle closes above the Kijun

Let’s take some trades!

TK Cross strategy: Short trade
TK Cross strategy: Short trade

In the example above you can see when Tenkan was in the Cloud it was still above the Kijun. Then they move down together for a while after which they cross below the Cloud in the first dark square.

We see that Chikou 26 candles ago was below price and we have a negative Kumo Future. We are now waiting for the candle to close and open a short position (sell). The stop loss is just above the Kijun line.

And voila, this trade turned out to be a success. We took profit when the Tenkan crossed the Kijun from below in the lower right hand corner in the second dark square.

Another example:

TK Cross strategy: Long trade
TK Cross strategy: Long trade

You see the TK Cross above the Cloud in the first dark square. We see on the left that Chikou above price 26 candles ago and we have a positive Kumo Future on the right.

We are now waiting for the candle to close and open a long position (buy). The stop loss is placed just below the Kijun line and in this case also just below the top of the Kumo Cloud, which is level 1 support.

This trade turned out to be a winner. We take profit in the top right hand corner the moment a candle closes below the Kijun line in the second dark square.

Delicious trade! 🙂

Here’s a recent TK Cross trade I took on Google:

TK Cross strategy: Recent long trade Google
TK Cross strategy: Recent long trade Google

Sames story as the one above, except this trade is still open and running in nice profits!

Ichimoku strategy #2: Kumo Breakout (my favorite!)

With this Ichimoku Cloud strategy we enter when price breaks out of the Kumo Cloud (Breakout). If we break out at the top, we go long (buy). If we break out at the bottom, we will go short (sell).

With this Ichimoku strategy you wait for the first candle that breaks out of the Kumo close and you get in on the next candle. This way you prevent false breakouts .

Kumo Breakout trading rules

Bullish setup (buy)

  1. Candle breakout and close out of the top of the cloud
  2. Price is above Kijun Sen line
  3. Cloud must be bullish in the future! (Positive Kumo Future)
  4. Chikou Span is above the price 26 candles back
  5. Entry: buy at the close of the breakout candle
  6. Stop loss: below the breakout candle opening, below the Kijun line
  7. Take profit: if candle closes below the Kijun line

Bearish setup (selling)

  1. Candle breakout and close out of the bottom of the cloud
  2. Price is below Kijun Sen line
  3. Cloud must be bearish in the future! (Negative Kumo Future)
  4. Chikou Span is below the price 26 candles back
  5. Entry: sell on close of the breakout candle
  6. Stop loss: above opening breakout candle, above Kijun line
  7. Take profit: if candle closes above the Kijun line
Kumo Breakout strategy: Long trade
Kumo Breakout strategy: Long trade

In the example above you see that the price breaks out of the top of the Kumo Cloud. Price is above the Kijun Sen line. On the left we see that Chikou was above price 26 candles ago. The Kumo Future is positive.

Green light!

We open a long position (buy) on the close of the breakout candle in the first dark square. The stop loss goes below the Kijun and therefore also below the Kumo Cloud. We take take profit in the second dark square at the top right, when price breaks the Kijun.

Another example:

Kumo Breakout strategy: Short trade
Kumo Breakout strategy: Short trade

In the example above you see that price breaks out of the bottom of the Kumo Cloud. Price is below the Kijun Sen line. On the left we see that Chikou was below price 26 candles ago. The Kumo Future is negative.

Ready to trade!

We open a short position (sell) on the close of the breakout candle below the cloud in the first dark square. The stop loss goes above the Kijun. We take take profit in the second dark square on the right, when price breaks the Kijun.

Kumo Breakout stop loss levels

Some extra information about stop loss levels. Personally, I usually place my stop loss slightly below the Kijun for a long position or above it for a short position.

You can also use the Kumo Cloud as a barrier to put your stop behind if it’s not too far away. The thicker the Cloud, the stronger the support of resistance. Remember that you use a stop loss to limit your loss.

Make sure there is always a barrier between your entry and your stop loss. Such as the Kijun or the Cloud. You can also use horizontal support and resistance levels.

Ichimoku strategy #3: Kijun Bounce

The Kijun Sen line actually represents the average of the market. The level at which the market is in balance. Price always comes back to the Kijun sooner or later. So this is a great level to search for potential trades.

Kijun is RSI

The Kijun also shows you what the RSI indicator and other oscillators show. Namely whether the market is “overbought” or “oversold”. Look…

Use Kijun Sen as an RSI
Use Kijun Sen as an RSI

As you can see you can remove the RSI indicator from your charts. You don’t need it. The distance between price and the Kijun shows the state of the market.

The greater the gap between the price and the Kijun, the more dangerous it becomes to take a trade in that direction.

Kijun is a 50% Fibonacci retracement level

I don’t want to make it too complicated, but for the people who trade with Fibonacci levels it might be nice to know that the Kijun is always a 50% Fibonacci retracement level. Check it out …

Kijun Sen is a 50% Fibonacci level
Kijun Sen is a 50% Fibonacci level

With the Kijun you therefore always have a 50% Fibonacci retracement level on your chart. This is one of the most popular levels to trade.

Kijun is a dynamic support and resistance level

Because the Kijun represents the balance in the market, it is also a dynamic support and resistance level. It works in the same way as, for example, a trend line. Watch…

Kijun is support and resistance
Kijun is support and resistance

How beautiful is that?

Kijun is therefore a built-in trend line from which price tends to bounce. And you can see what happens if it gets broken. This often means that a new trend is emerging in the other direction.

The Kijun does everything, but how can we trade it?

As you have just seen, the Kijun is a dynamic support and resistance level. We can trade those levels by buying on support and selling on resistance.

Almost all trades from the Kijun will be pullbacks within a trend. A perfect place to enter a position. But we have to take a good look at the candles and price action to determine whether we will enter a trade or not.

For this Ichimoku strategy I always look for charts where the price moves towards the Kijun. That is where the opportunities lie and these trades are also fairly easy to spot.

Here are some examples:

Price too far from Kijun, no trade opportunity
Price too far from Kijun, no trade opportunity

Above you can see that the price is way far too far from the Kijun. We are looking for bounces so there are no options for trades here.

But look now look at this…

Price bounces off Kijun
Price bounces off Kijun

Now that’s something we can work with. We have a clear stall and bounce from the Kijun and that opens up possibilities!

We can see price recently broke out of the cloud to the downside and is in a bearish trend. This is perfect to look for pullbacks to Kijun and get into the action.

Kijun Bounce trading rules

Bullish setup (buy)

  1. Price above Kumo cloud and Kijun for a long trade (buy)
  2. Look for long wicks at the bottom of candles
  3. These wicks must form on or just below the Kijun
  4. Find price action entry (for example, the break of the previous candle)
  5. Stop loss below the wicks, below the Kijun line
  6. Take profit when a candle closes below the Kijun line

Bearish setup (sell)

  1. Price below Kumo cloud and Kijun for a short trade (sell)
  2. Look for long wicks at the top of candles
  3. These wicks must form on or just above the Kijun
  4. Find price action entry (for example, the break of the previous candle)
  5. Stop loss above the wicks, above Kijun line
  6. Take profit when a candle closes above the Kijun line

For this Ichimoku strategy we only need the Kijun and the Kumo Cloud. Perhaps you already saw in the screenshot that I removed the rest of the lines from my chart. This way you get a clearer view.

Kijun Bounce strategy: Short trade
Kijun Bounce strategy: Short trade

Above you see a successful Kijun Bounce short trade (sell). Price is pulling back to the Kijun. Forms a candle with a long upper wick on top of the Kijun. We are below the Kumo Cloud and we have a negative Kumo Future.

Green lights!

We open a short position (sell) on the break of the low of the bottom of the Bounce candle that hits the Kijun. We put the stop loss just above the Kijun and we take profit the moment the Kijun line is broken from below (dark square).

Note: After the trade you see that the trend reverses and that price, after breaking the Kijun from below, now returns to the Kijun. This is not a buy signal, because we are still below the Kumo Cloud! The trade had been successful as you can see, but we abide by the rules.

Another example:

Kijun Bounce strategy: Long trade
Kijun Bounce strategy: Long trade

Above you see a successful Kijun Bounce long trade (buy). Price is pulls back to the Kijun. Forms a candle with a long wick at the bottom on the Kijun. We are above the Kumo Cloud and we have a positive Kumo Future.

We have a trade!

We open a long position (buy) on the break of the high of the Bounce candle that hits the Kijun. We put the stop loss just below the Kijun and the wick. We take profit when the Kijun line gets broken from above.


Potential profit and risk management

Most of you know that I think risk management is extremely important. In terms of risk to reward ratio I prefer to be around 1: 2. So if I risk $50 with my stop loss, then I want to take at least $100 on my take profit.

Unfortunately, this does not always work and the Ichimoku Cloud is a little tricky when it comes to setting targets in advance. We try to surf on the big trends and we only get out when the price crosses the Kijun. When this will happen cannot be predicted beforehand.

My solution for this is that I try to search for trades where the next support or resistance is 2x the distance as my stop loss (calculated from entry of course). I then take 50% profit and let the other half of the position ride until the price crosses over Kijun again.

I am still experimenting with this, because my win rate is pretty high but I feel like I’m leaving money on the table on some trades. But that is a luxury problem.

Which Ichimoku strategy is right for me?

Also with this I am still testing, but so far I have had the most success with the Kumo Breakout on the H4 and Daily time frames. Sometimes in combination with the TK Cross. I noticed that the Kijun Bounce works nicely for scalping on the shorter time frames.

Anyway, in the end you have to test it yourself. Fortunately there are many brokers where you can practice without risk.

Get your free BDSwiss demo account…

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Share your experiences in the comments and feel free to ask questions about the Ichimoku Cloud.

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