7 Point Plan to Use Ichimoku Cloud Charts to Analyze the Stock Market Direction & Make Better Forecasting Decisions. Ichimoku Clouds are Great for a Visually Stunning View of the Market.
What is the Ichimoku Cloud?
The Ichimoku Kinko Hyo is a Japanese stock chart indicator gaining in popularity. Ichimoku is different from other indicators as it enables you to clearly see the stock price trend, the momentum, and pivotal points for price direction trend change. This visually impressive indicator calculates the equilibrium in a stock price’s demand and supply to help predict future price movement.
Who Created the Ichimoku Cloud Indicator?
Goichi Hosoda, a journalist, started work on the indicator in the 1930’s and 30 years later released it in his 1969 book. The name Ichimoku comes from his nick-name as his friends referred to him as Ichimoku Sanjin, which in English means “what a man in the mountain sees.”
How Does Ichimoku Cloud Work?
There are three configurable parameters in the Ichimoku Cloud.
Tenkan-sen Calculation (the average of the 9 periods high + the average of the 9 periods low) / 2. This forms one outline of the cloud. As the moving average line is 9 periods, it usually forms the top of the outline of the cloud when the stock price is moving upwards.
Senkou Span B Calculation
Senkou Span B Calculation – (the average of the 52 periods high + the average of the 52 periods low) / 2. This is the longer moving average and forms the other side of the cloud outline. This means that when the price is falling, this forms the upper part of the cloud.
Kijun-sen Baseline or Standard Period
Kijun-sen Baseline or Standard Period – (the average of the 26 periods high + the average of the 26 periods low) / 2. This is very useful as adjusting this indicator allows you to control the offset of the indicator backwards or forwards in the future.
How to Use the Ichimoku Cloud?
Are you wondering where the market is heading? This is precisely the point of the Ichimoku Indicator. The configurable parameters and the cloud itself is usually offset 26 days (on a daily chart) into the future. This helps to predict and prepare for trend changes.
Essentially a really excellent tool for helping visualize a what stage the market or stock price is in.
Ichimoku Explained Simply
- Sell Signal – When a price pattern enters and breaks through the cloud downwards from above, this is a bearish sign.
- Buy Signal – When a price pattern enters the cloud from below and breaks out up through/above the cloud, this is a bullish sign.
- Potential Trend Change – The Cloud can also indicate a good area of support or resistance. As price moves sideways near the cloud is can signal a change in momentum.
This is a weekly chart of the S&P 500 mapped against the Ichimoku Cloud (Standard Settings in TC2000)
Ichimoku 7 Step Technical Analysis
I mapped the chart back to the year 2000, so we can visually compare the last recession ending in 2003, with the 2008 recession. How does the price compare with the Ichimoku Cloud on both of these occasions?
- In September 2000, the Price Bars broke through the Cloud resistance, signaling a market in decline.
- The Market enters into a 3-year bear market, finding resistance three times in late 2002 and 2003.
- In August 2003, the S&P500 broke out of the Ichimoku Cloud and moved vigorously into the New Bull Market.
- Moving forward to November 2007, the market enters the cloud from above, and the ensuing Bear market takes hold.
- August 3rd, 2009, the S&P enters the cloud from below. This is a potentially Bullish sign, but can really only really be confirmed when the index breaks out upwards through the cloud and moves higher on more substantial volume.
- On the volume pane (middle panel), we see that on both occasions, the bottom of the market took place on reducing volume.
- We also see the MACD Histogram (weekly), has remained bullish since entering the cloud in 2009 as it did in 2003.
4 Golden Rules To Interpret Ichimoku Cloud
- When the Stock Price exits from the Ichimoku cloud upwards, crossing above the cloud, this is a very positive sign.
- When the Stock Price exits the cloud downwards, this is a negative sign.
- When the Stock Price is in the cloud, this is a period of consolidation or essentially sideways movement.
- When the price stays above the cloud, this suggests a continued up-trend.
The Best Free Ichimoku Charting & Scanning Software
- TradingView: Best for Free Ichimoku Cloud Charting & Huge Social Trading Community
- TC2000: Best Free Ichimoku Market Scanning for US Investors
- MetaStock: Best for Powerful Backtesting & Technical Ichimoku Analysis
- Related Article: Top 10 Best Stock Market Trading & Analysis Software
Ichimoku Cloud Summary
The Ichimoku Cloud is an excellent way to visualize at what stage the market is in, and very helpful when timing a trade or even a longer-term ETF investment.
Video Guide to Japanese Candlestick Charts
Note: The chart in this article is provided by TC2000. This is, in my opinion, one of the finest free charting tools on the web. It has support for a vast number of indicators and trend lines. Check out this tool and the award-winning Telechart 2000 on the Worden Brothers Inc. Website website. Another great free charting tool is our review winning TradingView
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