Ichimoku Cloud

Ichimoku Cloud is a Range Chart

The Ichimoku Cloud is a chart overlay that shows the range of recent ( 9 bars) and intermediate (26 bars and 52 bars) term price movements. An interesting side note is that when Gerald Appel developed the MACD in the 1970s, about 30 years after the Ichimoku Cloud was first used in Japan, he also used 9 and 26 bars.

If you see the Ichimoku Cloud as a range chart then the explanation of all the different lines and colors will immediately make sense. Here is a chart with just the Cloud overlay and without the lines.

Ichimoku Cloud plot with Kumo and no lines.

Courtesy of Stockcharts.com

Kumo

The Cloud shows the disparity between the midpoints of the 9/26 bar range and the midpoints of the 52 bar range. The Cloud changes color to green when the 9/26 bar range moves above the 52 bar range and red when it moves below the 52 bar range. The plot is shifted 26 bars to the right so that it appears to project into the future.

When the Cloud on the right side of the price bars is green we say that the stock has a bright future. Red means that the stock has a dark future. The 9/26 bar midpoints are called Senkou Span A. The 52 bar midpoints are called Senkou Span B. The Cloud is called the Kumo.

That’s just a long winded way of saying that the stock is bullish when the short term range is higher than the longer term range and the stock price is higher than both. The value of the Ichimoku Cloud to the swing trader is that you can see all that and internalize if the stock has better bullish or bearish prospects in about a millisecond.

Here is the same chart with the lines added.

Ichimoku Cloud with all ines

Courtesy of Stockcharts.com

The video below explains the significance of the different lines and how they are useful to swing traders. There are three of them. Please do not ever refer to these lines as moving averages. They are comprised of individual plots of the midpoints (high+low/2) of the 9 bar range and the 26 bar range, and today’s actual closing price. They are not moving averages.

Tenkan Sen

The plot of the 9 bar range is called the Tenkan Sen or Turning Line. It follows price action fairly closely and when it is sloped sharply in one direction or the other you can see that the short-term range is expanding. A subtle clue that adds something useful to chart analysis.

Kijun Sen

The plot of the 26 bar range is called the Kijun Sen, the Standard Line or the Conversion Line. We consider the Kijun Sen as the center point of the chart. We know that price will eventually return to the Kijun Sen and can therefore make some reasonable judgments about future price action from the slope of the Kijun Sen and its chart location.

Chikou Span

The line lagging behind all the price action is the Chikou Span or Lagging Line. It is a plot of the closing price of the then current candlestick set backwards 26 bars. A plot of today’s closing price 26 bars in the past is not an intuitive indicator. You will, however, quickly see the value of the Chikou Span when you apply Ichimoku Rule #1 – this is a range chart. Shouldn’t we expect price to move more easily in its current direction when it is clear of recent buying and selling activity levels?

 

YouTube video of Ichimoku Chart

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