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Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a technical analysis instrument that belongs to the category of trend indicators. As all trend-following indicators, it serves the primary purpose of identifying the direction and reversal points of the prevailing market trend. What’s more, this isn’t its only purpose. Being quite versatile, Ichimoku can also work as an oscillator. That is to say, it gauges the speed of the price change for a given asset. As if it was not enough, Ichimoku is also capable of locating support and resistance levels. As you can see, there is quite a bit to this indicator. In itself, it can become a great foundation for your trading strategy. Learn how to set it up and apply in trading by reading the article!

How does it work?

To give an illustration of what Ichimoku Cloud is, let’s break it down into separate elements. There are five elements in total and each one is a different kind of a moving average.

Ichimoku Cloud settings on the IQ Option platform
Ichimoku is a complex indicator with several lines

The conversion line Tenkan (blue) and the standard line Kijun (red) are also called equilibrium lines. The conversion line (blue) averages the highest high and the lowest low for the last 9 periods. It can signal the trend reversal when crossing the standard line (red). In comparison, the standard line averages the highest and lowest values for the last 26 periods. It serves as a dynamic support and resistance level.

The second pair of moving averages Senkou Span A and Senkou Span B form the so-called cloud. Senkou Span A averages the two equilibrium lines and shifts the derived values 26 periods ahead. Senkou Span B averages the highest high and the lowest low for the last 52 periods, shifting the results 26 periods forward.

Ichimoku Cloud: How to Use Indicator in Trading?
The so-called cloud, created by the two lines

In between Senkou Span A and B forms a shaded area on the chart. It is a cloud, which changes color from red to green and vice-versa every time these two boundaries cross each other. When the cloud turns green, overall sentiment on the market is considered to be bullish. Conversely, when the color becomes red, market sentiment is considered to be bearish. The cloud changes its color when the trend reversal is possible. The vertical distance between the borders of the cloud can serve as an indicator of the market volatility.

Finally, the Chikou Span (green-colored line) represents the closing price of the current candle, which is shifted back by 26 periods. This lagging moving average serves as an aid to confirm other signals, received by this indicator.

How to set up?

Here is how to set up Ichimoku Cloud:

  1. Go to the ‘Indicators’ menu by clicking the corresponding button in the bottom-left corner of the screen.
  2. Go to the ‘Trend’ tab
  3. Choose Ichimoku Cloud from the list of available indicators and click apply without changing the settings.

Setting up Ichimoku Cloud

That’s it! You will be able to change the settings for Ichimoku Cloud or remove the indicator from the chart by going back to the ‘Indicators’ icon. Don’t change the settings until you understand completely what you are doing, as it can be quite tricky for a newcomer.

Trading signals

All things considered, Ichimoku Cloud suggests a bullish trend when candles are above the cloud. When the cloud turns from red to green, the candles move above the Kijun base line, and the Tenkan conversion line moves above the baseline, an indicator is signaling that the market may be reversing to bullish. On the contrary, Ichimoku Cloud suggests a bearish trend when the candles are below the cloud. When the cloud turns from green to red, the candles move below the Kijun base line, and the Tenkan conversion line moves below the baseline, an indicator is signaling that the market may be reversing to bearish. Professional traders prefer to combine Ichimoku Cloud with other indicators for a more accurate analysis. However, it can also be used on its own.

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