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A Japanese journalist called Goichi Hosoda invented this charting technique in 1936. Since then, the Ichimoku cloud indicator has become a popular trading tool in Japan. It has recently gained popularity among traders in the West.

Before we reveal the chart, let’s prevent a major brain meltdown by first introducing the stuff you are going to see on your chart when you insert the cloud indicator onto it.

Cloud Indicator - Ichimoku Kinko Hyo Elements - Kijun, Tenkan, Chiko

Now we are going to add all these lines and moving averages to our trading chart.

Don’t panic; your eyes are going to get used to this, and after one day you will feel that a chart without Ichimoku is totally naked.  First, let’s do a basic introduction, and then jump into the interpretation of Ichimoku and all the secrets you need to know.

(Click on image to enlarge)

Cloud Indicator - Ichimoku added to a Candlestick Chart

Cloud Indicator - Calculations

Kijun line (baseline in solid, thick pink color). This is the average of the highest high and the lowest low within the past 26 candles. We can also call it the “slow line” because it reflects a whole 26 periods.

Tenkan line (turn line, solid, thin black color). This is the average of the highest high and the lowest low within the past 9 candles. We can also call this the “fast line” because it reflects fewer periods.

Chiko (sometimes spelled chikou) span (delayed line, thick, dashed blue color). This shows the most recent candle’s price, but the indicator draws it 26 periods behind.

Kumo (cloud). This is the area between two lines that plots the future! The first thin, dotted line is calculated by averaging the tenkan line and the Kijun line plotted 26 periods ahead. The second one is determined by averaging the highest high and the lowest low for the past 52 periods plotted 26 periods ahead. We call these two lines the Senkou spans. Senkou means “future”.

One good thing about modern trading, including those of Forex, stocks, equities and even ETF platforms, is that you can choose different colors for each of the Ichimoku lines to make your Ichimoku indicator more colorful and to identify the lines easily.

Common Interpretations of the Cloud Indicator

• As long as the five lines are parallel, the trend will continue in that direction.
• When the candles are inside the Ichimoku cloud, that means that the market is in the process of consolidating. It is not a good time to buy or sell.
• You can use the lower band of the prevailing cloud as a layer of support.
• You can use the upper band of the prevailing cloud as a layer of resistance.