Ichimoku Kinko Clouds

Clouds can be very useful in adjusting a basic trading position. Partial profits can be taken or tentative new positions can be entered into without waiting for the moving averages to cross.

Firstly, if today’s candle is above the Cloud, the trend is for higher prices. The top of the Cloud is the first level of support and the bottom is the second level of support. From experience, I have seen that these really do often work, but one has to give them a little leeway. Normally, I would also wait until the end of the day to see whether the closing price is below the Cloud, before even beginning to consider whether the trend has reversed. The opposite is the case when candles are below the Cloud, with this becoming the area of resistance. Very often the market seems to move through the first support/resistance level and fails somewhere in the middle of the Cloud. When this happens we watch the shape of the daily candlesticks to see if they give a reversal signal. Note the stepped Senkou Span B line, as slowly the high of the last 52 days drops out.

Ichimoku charts are built around candlestick charts with the following five lines added- 1. Tenkan-sen (Highest High + Lowest Low)/2, for the past 9 periods 2. Kijun-Sen (Highest High + Lowest Low)/2, for the past 26 periods 3. Senkou Span A (Tenkan-Sen + Kijun-Sen)/2, plotted 26 periods ahead 4. Senkou Span B (Highest High + Lowest Low)/2, for the past 52 periods, plotted 26 periods ahead 5. Chikou Span Today’s closing price plotted 26 periods behind Mid-prices are used for all lines except Chikou Span. The three key time periods are 9, 26, 52. The Cloud is the area between Senkou Span A and Senkou Span B.

The final line to be added is Chikou Span (“Lagging Span”). Some chart packages plot the current price 25 days ago. You will know whether this is the case as the lines bob up and down during the day as the current price changes. In the above chart, Chikou Span can be seen as the dark green line. This is today’s closing price plotted 26 days behind the last daily close.

After plotting candles and averages, the next step is to plot the two lines that form the actual Cloud. The daily candles are here, in blue as we saw them before. The moving averages are calculated: pink for the 9 day and dark green for the 26 day. Senkou Span A & B 1. The first line of the Cloud, the deep pink one, is known as Senkou Span A (“Leading Span A”) and is calculated by adding the Tenkan (9-day average) and Kijun (26-day average) values and dividing by two. This line is then plotted 26 days ahead of the last complete day’s trading. 2. The second line (turquoise), imaginatively called Senkou Span B (“Leading Span B”), is calculated by finding the highest price of the last 52 days, adding to it the lowest price of the last 52 days, and dividing by two. This is also plotted 26 days ahead. So, although the two lines have similar names, their construction is very different. The space between these two lines is shaded - that is the Cloud. Senkou Span A Senk

Candlesticks with moving averages Once the daily candles are drawn, the next thing to do is add two moving averages. These are used in the same way as we do in the West, with crossovers giving buy or sell signals. When the short term average is above the longer term one, the trend is to higher prices; when the short term average drops below the longer one, that is a sell signal. A position is held until these reverse. Based purely on moving average crossovers, one would currently be long since early November. For Ichimoku charts we use two specific moving averages which are: 1. Tenkan-sen (“Conversion Line”): is a nine-day moving average, and 2. Kijun-sen (“Base Line”): is a twenty six-day moving average. As usual, the shorter moving average whips around the longer one, giving points at which positions should be switched from long to short and vice-versa. The origins of 9 and 26 days as the moving average periods The number of days used are related to the fact that

Daily data is the standard frequency Although traditional candle theory looks at hourly, daily, weekly or monthly charts, just as we do with bar charts, with Ichimoku charts only daily charts are used. Having said that, some chartists bend the rules and use monthly, weekly or hourly units of time – the lesson being: never be afraid to experiment. The fact that daily candlesticks are used means that the system is for medium to long term strategies, and is therefore not suitable for jobbers and day traders. Mid-point prices used We now start moving into new territory! Ichimoku charts differ fromWestern ones in that they are not drawn using daily closing prices. Instead, ‘mid-prices’ are used. This method takes the average of the high and low price of the day (simply adding the high and low price and dividing by two). The mid-price calculation is not adjusted for volume. This is a good method for markets where there is an arbitrary cut-off time, such as FX which is a global 24