The Ichimoku Cloud indicator is the most complex of the standard tools included in the basic set of MT4 and MT5. It is rarely used in trading systems, but it is believed that it can be adjusted to the asset so that it will give up to 90% accurate signals. The complexity of the indicator is in its constituent parts, which together represent an independent trading system. The indicator consists of lagging and leading elements, which can be compared with trend, channel tools and oscillators. How to interpret the signals of the Ichimoku Cloud – in this review.
Building trading systems using the Ichimoku Cloud
The Ichimoku Cloud indicator has already been discussed in this and this review. Recall that it consists of 5 lines, two of which are an analogue of moving averages, two are lines formed by the channel zone, one is an analogue of an oscillator.
- Kijun-sen and Tenkan-sen are the so-called dynamic lines, which differ only in the period set in the parameters. Their calculation formula is the arithmetic mean between the extremes for the period specified in the settings.
- Senkou Span A and Senkou Span B – lines forming a cloud – the shaded part of the graph. Their formula also uses period highs and lows, but also moves the price forward.
- Chinkou Span – shifted Close price.
All these constituent parts give their own set of signals that you need to see, decipher and compare with each other.
- Cloud Kumo. It is formed by the lines Senkou Span A and Senkou Span B. The theory says that the distance between them is a flat zone, and the lines themselves are resistance and support levels.
- A change from an ascending cloud to a descending one and vice versa may indicate a change in trend.
- The exit of the price from a descending cloud down or from an upward one indicates a trend in the corresponding direction.
- If the price is above the ascending cloud and goes up, this indicates the continuation of a strong trend. Mirror situation for the downward movement.
The change of the cloud from ascending to descending confirmed a strong downtrend. But the flat signal in the rising cloud did not work.
2. Kijun-sen and Tenkan-sen. These two lines work on the EMA principle, although they have a different calculation formula. Between themselves, their formulas are the same with the only difference being that the red Tenkan-sen line is fast, with a shorter period.
- The price is above/below Kijun-sen. This line (blue on all screenshots) defines a long-term trend, so its breakout by the price is considered a signal. A breakdown of the line down is a downtrend, up is an uptrend.
- Crossing Kijun-sen and Tenkan-sen. Additional to the previous one, amplifying the signal. If the red Tenkan-sen line crosses the blue one from bottom to top and the price is above the crossing point, a signal to go long. For a short position, the situation is reversed.
The second signal is false. The red line crossing the blue line from top to bottom did not lead to a downtrend. On the other hand, the first signal was confirmed with a delay by a change in the color of the cloud, while on the second signal the cloud was ascending. True, according to this logic, the 4th signal should have been false, since it also appeared on the rising cloud. This is an example of signal alignment ambiguity.
3. Chinkou Span. The green line, which is an analog of the oscillator. This is a closing price with a shift, showing how far the price has moved from previous values. The farther the line is from the price, the more likely it is to reverse. This is its main signal.
The trading system considered in the complex assumes that the cloud signals are preliminary, the main one is the intersection of dynamic lines, Chinkou Span is an indicator for exiting the market. But not everything is so simple. For example, it is not uncommon for situations where dynamic lines intersect inside the cloud and going beyond Kumo turns out to be a delayed signal.
Ichimoku Cloud Signal Problems:
- The indicator works only on daily and more intervals. This follows from the complexity of the combination of signals, which in the “short-term” simply will not have time to form and, moreover, be compared.
- Signals often contradict each other. For example, the levels of resistance / support of the cloud are actually easily “flashed” by the price through and through without a hint of momentum. That is, we are not talking about a flat.
- It is difficult to determine the priority of a particular signal. At some point, the oscillator signal may turn out to be stronger, at some point it is easier to ignore it. In many sources, the analysis of signals is “far-fetched.” And sometimes it’s easier to remove part of the Ichimoku lines from the chart altogether. Leaving, for example, only dynamic lines with an oscillator.
Conclusion. Ichimoku Cloud Signals is an interesting constructor for those who like to deeply understand technical analysis and create their own trading systems. Possible combinations of signals are a reason to strain your brain and learn how to optimize testing parameters. And if you add patterns with oscillators to Ichimoku, you can “squeeze” a good result out of the indicator.