Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a technical analysis tool developed by Goichi Hosoda, a Japanese journalist, in the late 1930s. Ichimoku Cloud is used to assess the trend direction, support and resistance levels, and potential trading signals.
The term "Ichimoku" translates to "one glance" or "at a glance" in Japanese, which reflects the primary goal of the indicator—providing a comprehensive view of the market in a single chart. It consists of several components that work together to generate trading insights.
The key components of the Ichimoku Cloud are as follows:
Conversion Line: average of the high and the low over a short period (usually 9)
Base Line: average of the high and the low over a mid-period (usually 26)
Leading Span A: average of Conversion and Base Line shifted mid-period (same as that of Base Line) to the future.
Leading Span B: average of the high and the low over a long period (usually 52) plotted ahead.
Cloud: The area between Leading Span A and B. The thickness of the cloud reflects the volatility and potential support/resistance of the market.
Lagging Span: closing price plotted backward for a specific number of periods (usually the same as that of Base Line). It helps traders assess the current trend's strength by comparing it to past price action.
By analyzing the relationship between these components and the price action, traders can identify various trading signals, including trend confirmations, support and resistance levels, and potential reversals. The cloud is handy for determining trend direction and providing dynamic support and resistance levels.