How the Ichimoku Cloud Can Boost Your Forex Trading

Forex traders seeking to take the next step with their currency investing should consider the benefits of the Ichimoku Cloud. Referred to also as the Ichimoku Kinko Hyo, this technical indicator helps determine resistance support lines, trends, momentum as well as buy and sell signals. With careful study, currency investors will be able to identify opportunities within the currency pair they are trading by merely looking at this indicator. Originally developed by the journalist Goichi Hosoda in 1969, the Ichimoku Cloud serves as one of the most clear and powerful indicators on a technical chart once it is understood.

Below is insight on the Ichimoku Cloud in terms of:

  • Calculating Value
  • Identifying the Cloud
  • Buy and Sell Signals

Determining Value

Within the Ichimoku Cloud, four of the five plots are determined by the mean value of the low and high price points over a designated time period. For instance, the first point plot serves as an average value of the high price point over nine days and the low price value over the same time duration.

Understanding the Cloud

The Cloud or "Kumo" functions as the most visible feature of the Ichimoku Cloud. The cloud is formed both by the Leading Span A and Leading Span B. The Leading Span A operates as the mean value of the Base Line and the Conversion Line. Given that both conversion lines are calculated within 9 and 26 periods, more compact moving averages tend to be more volatile and quicker to respond to price action than moving averages of longer time periods. There are two most effective approaches to identifying the overall trend of a currency pair with the Cloud. On one hand, the trend is risky if pricing is rising above the Cloud on the chart. On the other hand, prices are falling when trend falls below the Cloud. Of course, the trend is flat when prices fall within the Cloud. Moreover, the uptrend becomes bolstered when the Leading Span A transcends the Leading Span B. This market move yields what is known as a green Cloud. In contrast, a downtrend is emboldened as the Leading Span A falls below the Leading Span B, thereby yielding a red Cloud. Given that the Cloud moves forward by 26 days, it can help prognosticate future levels of price resistance and support.

Trend and Signals

The Ichimoku Cloud provides a powerful source for signaling trends in rising or falling prices of a given currency pair. With this technical indicator, the Base Line and the Conversion Line are utilized to exploit more evident signals given in the marketplace. Note, as discussed above, that buy signals are bolstered when price points become elevated above the cloud and the cloud becomes green. Sell signals become heightened when price values fall below the cloud and it is red.

Understanding these signals will facilitate your ability to trade effectively within the direction of the larger trends in the marketplace. Signals will be considered weaker if they move counter to the dominant trend line. To summarize, bullish signals occur when: price rises above the Cloud; the Cloud turns green from red; and the conversion line and the price action moves above the base line. In contrast, bearish signals are confirmed when: price action moves below the cloud; the cloud turns red from green; price action and the conversion line falls below the base line.