The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction. It does this by taking multiple averages and plotting them on a chart. It also uses these figures to compute a “cloud” that attempts to forecast where the price may find support or resistance in the future.
In Japanese, it is called the ‘Ichimoku Kinko Hyo’ which roughly means ‘one look equilibrium chart’ – because with just one look, traders can receive a range of information.
The Ichimoku Cloud was developed by Goichi Hosoda, a Japanese journalist, and published in the late 1960s. It provides more data points than the standard candlestick chart.
The Ichimoku Cloud indicator is made up of five lines or ‘plots’:
Traders will often use the Ichimoku Cloud as an area of support and resistance depending on the relative location of the price. The cloud provides support/resistance levels that can be projected into the future. This sets the Ichimoku Cloud apart from many other technical indicators that only provide support and resistance levels for the current date and time.
When the actual cloud aspect of the Ichimoku indicator appears on a chart, it is as two lines filled with a colour. If the Senkou span A is above the Senkou span B on the chart, this indicates an upward trend and the cloud will appear green in colour. If the Senkou span B is above the Senkou span A, this indicates a predominantly downward trend and the cloud will appear red in colour.
The price line itself will appear above the cloud when the trend is up, and below the line if the trend is downward. If the price line sits within the cloud, it is assumed that the trend is ‘flat’ or horizontal.