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The Ichimoku Cloud is a comprehensive indicator designed to produce clear signals. Chartists can first determine the trend by using the cloud. Once the trend is established, appropriate signals can be determined using the price plot, Conversion Line, and Base Line. The classic signal is to look for the Conversion Line to cross the Base Line. While this signal can be effective, it can also be rare in a strong trend. More signals can be found by looking for price to cross the Base Line (or even the Conversion Line).
It is important to look for signals in the direction of the bigger trend. With the cloud offering support in an uptrend, traders should also be on alert for bullish signals when prices approach the cloud on a pullback or consolidation. Conversely, in a bigger downtrend, traders should be on alert for bearish signals when prices approach the cloud on an oversold bounce or consolidation.
Forex trading Signals
The Ichimoku Cloud can also be used in conjunction with other indicators. Traders can identify the trend using the cloud and then use classic momentum oscillators to identify overbought or oversold conditions.
Identifying the Trend
The cloud (Kumo) is the most prominent feature of the Ichimoku Cloud plots, and is often used to identify the overall trend. The Leading Span A (green) and Leading Span B (red) form the cloud. The Leading Span A is the average of the Conversion Line and the Base Line. Because the Conversion Line and Base Line are calculated with 9 and 26 periods, respectively, the green cloud boundary moves faster than the red cloud boundary, which is the average of the 52-day high and the 52-day low. It is the same principle with moving averages. Shorter moving averages are more sensitive and faster than longer moving averages.
There are two ways to identify the overall trend using the cloud. First, the trend is up when prices are above the cloud, down when prices are below the cloud and flat when prices are in the cloud. Second, the uptrend is strengthened when the Leading Span A (green cloud line) is rising and above the Leading Span B (red cloud line). This situation produces a green cloud. Conversely, a downtrend is reinforced when the Leading Span A (green cloud line) is falling and below the Leading Span B (red cloud line). This situation produces a red cloud. Because the cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.
Chart 2 shows IBM with a focus on the uptrend and the cloud. First, notice that IBM was in an uptrend from June to January as it traded above the cloud. Second, notice how the cloud offered support in July, early October, and early November. Third, notice how the cloud provides a glimpse of future resistance. Remember, the entire cloud is shifted forward 26 days. This means it is plotted 26 days ahead of the last price point to indicate future support or resistance.