Introduction

Ichimoku Cloud, AKA the Ichimoku Kinko Hyo, is a versatile indicator that helps traders in identifying trend direction, gauging the momentum, drawing support and resistance etc.

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The name basically means the ‘one look equilibrium chart’. It means that with one look, traders can identify the market trend and find potential buy/sell signals within that trend. This indicator consists of five moving averages and a cloud formed by two of the averages.

The Ichimoku Cloud seems complicated when viewed on the chart, but we have tried our best to simplify this. After reading this article, even a novice trader can understand on how to apply this indicator to their charts. The default setting of the indicator is 9, 26, 52 and traders can change these parameters based on their trading style.

Ichimoku Cloud – Core Components

Ichimoku Cloud consists of five lines on the chart and a shaded area in between. Let’s understand each of these lines. As you know each line on the indicator is a moving average, you can look at the indicator as five moving averages. The below content outlines each of the moving averages on the chart, and also on how the cloud is formed.

  1. Tenkan Sen is a moving average, which displays the middle value of the lowest and highest points over the last nine periods.
  1. The default value of the Kijun Sen is 26. The Kijun line is often slightly below the Tankan Sen. This reason being, higher the period of moving average it takes longer time to react.
  1. The default value of the Chikou span is 26, and it represents the current value. This line is 100% identical with the price action.
  1. Senkou Span or The Cloud consists of two lines. The first line of the Senkou Span (Senkou A) is the current average of the lows and highs of Tenkan Sen and Kijun Sen lines over 26 periods. The second line of the Senkou Span (Senkou B) displays the middle point between the highest point and the lowest point. Just like the other line of the Senkou Span, this line is also displayed over 26 periods. The cloud is the area on the chart, which is comprised of the interactions between two averages above the Senkou Span. The cloud also represents the furthest support/resistance level.

When Kijun Sen and Tenkan Sen are above the cloud, it means the trend is positive

When Tenkan Sen and Kijun Sen are below the cloud, it means the trend is negative

Using the cloud to determine the trend in any security

  • When the prices are below the cloud on the chart, it means the trend is down in the market. Likewise, when the prices are above the cloud, it means that the trend is up.
  • When the Senkou A is going upward, and above the Senkou B, it means the bullish trend is gaining momentum in the market. When the Senkou A is dropping and goes below the Senkou B, it means the downtrend is strengthening.
  • When the Tenkan Sen, Kijun Sen and the price of the security are above the cloud, and at the same time, if Tenkan Sen crosses the Kijun Sen from above, it can be considered as a buy signal.
  • When the Tenkan Sen, Kijun Sen and the price of the security are below the cloud, and the Tenkan Sen crosses the Kijun Sen from below, it can be considered as a sell signal.

Installing ‘Ichimoku Cloud’ in MT4 (Step-by-step process)

Ichimoku cloud is a popular indicator in the trading community, and it is available in the MT4 terminal by default.

Open the MT4 terminal and click on Insert.

Click on Indicators > Trend > Ichimoku Kinko Hyo

A new window will pop up where you can change the setting. We suggest you go with the default setting. In the below chart, we have plotted this indicator on the EUR/USD chart.

Ichimoku Cloud – Trading strategies

Ichimoku Breakout Trading Strategy

The buy/sell signals occur when the price breaks through the cloud. Open the trade in the direction of the breakout and hold it until the prices breach the Kijun Sen.

As you can see in the image above, at first, the prices went through the Kijun Sen and Tenkan sen line. Then the prices break through the cloud in an upward trend, which is a potential buy signal for us. If the prices break through the cloud in a downward trend, it will be a sell signal for us.

Ichimoku Cloud + RSI Divergence Strategy

When you use the Ichimoku cloud to identify the market trend, it is also essential to understand when the trend is over. RSI divergences will help you in identifying the possibility of a market reversal.

When the prices break the Kijun Sen, Tenken Sen and the cloud, activate your buy trades. Close your trades when the RSI indicator shows you a proper divergence because divergence means that there is a possibility of the trend reversal.

Most of the time RSI indicator gives the divergence near the major support/resistance areas. This means that you can ride even bigger moves by using the above strategy. Make sure to close your trades when the RSI gives you the signal of reversal.

Conclusion

The Ichimoku Cloud is a group of five separate indicators collectively combined to form a trend following indicator. It is pretty versatile compared to other indicators.

The bullish configuration of the indicators goes, from high to low in terms of positioning on the chart:

  1. Lagging span (Chikou span)
  2. Conversion line (Tenkan line)
  3. Baseline (Kijun line)
  4. Leading span A (Senkou A)
  5. Leading span B (Senkou B)

The bearish configuration would be exactly the opposite.

  1. Leading span B (Senkou B)
  2. Leading span A (Senkou A)
  3. Baseline (Kijun line)
  4. Conversion line (Tenkan line)
  5. Lagging span (Chikou span)

Traders can use this indicator stand-alone to generate the buy/sell signals. But if you can pair it with other indicators for confirmation, you can generate and filter out more accurate signals.

Hope you got the gist of the Ichimoku cloud indicator in MT4. Use this in your daily trading activities and don’t forget to let us know your results in the comments below. Happy Trading!

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