How to Use Ichimoku Cloud in Forex
The Ichimoku Cloud provides a clear market trend direction to the traders and helps them make market decisions accordingly. It also provides traders with the support and resistance levels in the market that result in identifying ideal entry and exit price levels. In our article, we will dive deeper into the concept of the Ichimoku Cloud and how traders can apply it while trading.
What is the Ichimoku Cloud?
The Ichimoku Cloud includes a set of technical indicators that help traders identify the market’s resistance and support levels, trend direction and momentum. The Ichimoku Cloud indicator takes the currency pair price’s multiple averages on a chart and uses the graphical representation to create a cloud that forecasts where the prices will observe their resistance or support level.
Types of the Ichimoku Cloud pattern
1. Bullish Ichimoku Cloud Pattern
This pattern occurs during an uptrend where the currency pair prices are above the conversion line (which is the mid-value of the lowest and highest currency pair price in the last nine periods). When this pattern forms, the conversion line is above the base line (which is the mid-point price in the last 26 periods). Both of these lines trend upwards in the market with constantly increasing prices, making the cloud a bullish signal for traders. As the prices start trading above the cloud, it signals traders to place buy/long orders in the market due to the continued uptrend.
2. Bearish Ichimoku Cloud Pattern
This pattern occurs during a downtrend where the currency pair prices are below the conversion line. In turn, the conversion line falls below the base line (the mid-value price of the lowest and highest currency pair price in the last 26 periods). Both of these lines trend downwards in the market with constantly decreasing prices, making the cloud a bearish signal for traders. As the prices start trading below the cloud, it signals traders to place sell/short orders in the market due to the continued downtrend.
How to calculate the Ichimoku Cloud?
1. Calculate the conversion and base Line
As the first step, calculate the Conversion Line, also called the Tenkan Sen and the base line, also called the Kijun Sen. Both Conversion Line and Base Line provide traders with the support resistance levels of the currency pair that help them identify the ideal buy or sell price levels. Conversion Line = 9-period high + 9-period low / 2 Base Line = 26- period high + 26- period low / 2
2. Calculate the leading Span A line
Then calculate the Leading Span A, the line which is used to measure the market momentum and confirms traders the entry/exit levels based on support and resistance levels. This line is also called the Senkou Span A. Leading Span A = Conversion line + Base line / 2
3. Calculate the leading Span B line
The next step is to calculate the Leading Span B, also known as the Senkou Span B, the line that works with the Leading Span A to form the cloud (called Kumo) that provides traders with the actual support and resistance price levels. Leading Span B = 52- period high + 52- period low / 2
4. Compute the lagging span value
The last calculation is that of the Lagging Span, also known as Chikou Span, which is ascertained by plotting currency pair closing prices for 26 periods in the past from the most recent candlesticks. This helps traders identify the market momentum and trend reversals, if any.
- The area between Leading Span A and Leading Span B is the cloud that provides traders with the support and resistance levels which in turn provide them with the ideal sell and buy price levels
- When the Leading Span A line is above the Leading Span B line, it indicates a bullish trend and signals traders to place buy/long orders
- When the Leading Span A line is below the Leading Span B line, it indicates a bearish trend and signals traders to place sell/short orders
Combining these five given indicators together provides traders with the complete Ichimoku Cloud, where each of these indicators provides some unique information about the currency pair price movement.
Ichimoku Cloud Trading Strategy
1. Wait for an uptrend breakout
To trade the Ichimoku Cloud, you must wait for the currency pair prices to trade above the cloud in order to recognize a bullish trend. As the cloud highlights the support and resistance levels, a price breaking above the cloud would enable traders to place buy orders in the uptrend. If the price breaks below the cloud, it will signal traders to exit the market due to the expected downtrend.
2. Wait for the Conversion Line and Base Line Crossover
When the price breaks above the cloud, it must be followed by the Conversion Line crossing the base line from above. This would confirm the bullish trend in the market. If you are looking at short/sell signals, wait for the conversion line (CL) to cross the base line (BL) from below during a downtrend to confirm the bearish market sentiment.
3. Enter trade right after the crossover
As soon as the CL crosses the BL from above and prices continue to trade above the cloud, it sends traders a signal to enter a trade right at the opening price of the succeeding candlestick.
4. Place the stop loss order
You can place the stop loss order right below the lowest price of the breakout candlestick, after which the market changes its direction.
- Place stop loss at the low of a bullish candlestick in an uptrend
- Place stop loss at the low of a bearish candlestick in a downtrend
5. Place a take profit order
After fixing your stop-loss order, you can place our take profit order right when the CL line crosses the BL line from below to lock in potential gains. At this point, you can also exit your trade if the market moves against your favourable decision (downtrend).
Trade the Ichimoku Cloud today to identify trend directions
The Ichimoku Cloud helps traders with ideal entry and exit levels after indicating the forecasted market trend. You can start trading the Ichimoku Cloud with several other indicators to confirm market analysis through Blueberry Markets and experience a smooth trading process. Sign up for a live trading account or try a risk-free demo account.
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