When applied to a price chart, it consists of five lines which can act as resistance or support levels. They are:
In addition, there is a central element that is called the “cloud” (Kumo) which is formed by the Leading Span A and B and represents areas in the price chart that have support or resistance. Its main purpose is to identify current price trends in the context of past price activity.
The Ichimoku cloud helps you identify trends
The cloud is the most important part of the Ichimoku and is the key to interpreting it. Once you’ve identified the cloud, all you have to do is look at where price action is in relation to it to identify a trend and how strong it is as well as any corrections that may be happening. If price movement is on top of the cloud, there is an uptrend, while if it is below the cloud, there is a downtrend. If the price movement is inside the cloud, then the trend is sideways. In addition, if the cloud changes color during an uptrend or downtrend, it indicates that a correction is imminent and you need to adjust your trading strategy accordingly.
Trading signals guidelines
Here is how trading signals are generated with Ichimoku. First, look at where the conversion line and base line are in relation to the cloud. If they are on top of or below the cloud, follow these guidelines:
If they are inside the cloud, they still generate trading signals based on the above guidelines but are less reliable and need to be confirmed with other indicators.
Last update: 14. February
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