after my show this am i had some request to post a comprehensive understanding or the Ichimoku Cloud indicator

Ichimoku Cloud

A technical indicator that is used to gauge momentum along with future areas of support and resistance. The Ichimoku indicator is comprised of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chickou span. This indicator was developed so that a trader can gauge an asset's trend, momentum and support and resistance points without the need of any other technical indicator.

Tenkan-Sen

component of the Ichimoku Kinko Hyo indicator that is primarily used to measure short-term momentum. This line is calculated by using the following formula:

This line is generally constructed by only considering the highs and lows for the last seven to nine time periods. The resulting line is interpreted in the same manner as a short-term moving average.

The Tenkan-sen is generally used in combination with the Kijun-sen to create predications of future momentum. A buy signal is created when the Tenkan-sen line moves above the Kijun-sen, while a sell signal is created when the Tenkan-sen line moves below the Kijun-sen line.

Many technical traders use the Tenkan-sen as a tool for predicting levels where the price of the asset will find short-term support.

Kijun-Sen

A component of the Ichimoku Kinko Hyo indicator that is primarily used to measure medium-term momentum. This line is calculated by using the following formula:

The formula that is used to create the Kijun-Sen is nearly identical to the formula used to create the Tenkan-Sen except the number of time periods used in the calculation is increased to better gauge longer-term momentum.

The Kijun-sen is generally used in combination with the Tenkan-sen to create predications of future momentum. A buy signal is created when the Tenkan-sen line moves above the Kijun-sen, while a sell signal is created when the Tenkan-sen line moves below the Kijun-sen line. The Kijun-Sen is often regarded as the trigger line for traders who use the Ichimoku method.

Senkou Span A

A component of the Ichimoku Kinko Hyo indicator that is used to measure momentum and future areas of support and resistance. Senkou span A is always plotted alongside Senkou span B and the area between the two lines is filled with shaded indicator lines, also known as the cloud, which is used by traders to predict levels of future support/resistance. Senkou span A is calculated by using the following formula:

The trend is deemed to be downward when Senkou span A is located below senkou span B. In practice, the indicator is most commonly used to predict the reversal of a current trend when the senkou spans cross over each other.

Senkou Span B

A component of the Ichimoku Kinko Hyo indicator that is used to create the 'cloud' of the indicator. Senkou span B is always plotted alongside Senkou span A and the area between the two lines is shaded. The shaded area, known as the cloud, is then used to give traders an idea of future support and resistance. Senkou span B is calculated by using the following formula:

Senkou span B is generally regarded as the slowest moving component of the Ichimoku indicator because it is created by using the greatest number of time periods in its calculation (generally 52 time periods).

The trend is deemed to be downward when Senkou span A is located below senkou span B. In practice, the indicator is most commonly used to predict the reversal of a current trend when the two senkou spans cross over each other.

Chikou Span

A component of the Ichimoku Kinko Hyo indicator that is created by plotting recent price movement 26-periods behind the latest closing price. The number of periods used to lag the Chikou span is customizable so that transaction signals are generated more or less frequently.

Also known as the "lagging span".


The trend is deemed to be upward when the Chikou span is located above the closing prices and downward when the indicator is located below them. Many traders watch for the Chikou span to cross below the closing prices as a signal that the price of the asset is getting exhausted and is likely to experience a pullback.

What is the Cloud?
The Ichimoku Kinko Hyo or equilibrium chart isolates higher probability trades in the forex market. It is new to the mainstream, but has been rising incrementally in popularity among novice and experienced traders. More known for its applications in the futures and equities forums, the Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. The application offers multiple tests and combines three indicators into one chart, allowing the trader to make the most informed decision. Learn how the Ichimoku works and how to add it to your own trading routine.

Before a trader can trade effectively on the chart, a basic understanding of the components that make up the equilibrium chart need to be established. Created and revealed in 1968, the Ichimoku was developed in a manner unlike most other technical indicators and chart applications. Usually formulated by statisticians or mathematicians in the industry, the indicator was constructed by a Tokyo newspaper writer named Goichi Hosoda and a handful of assistants running multiple calculations. What they came up with is now used by many Japanese trading rooms because it offers multiple tests on the price action, creating higher probability trades. Although many traders are intimidated by the abundance of lines drawn when the chart is actually applied, the components can be easily translated into more commonly accepted indicators.

Essentially made up of four major components, the application offers the trader key insight into FX market price action. First, we'll take a look at both the Tenkan and Kijun Sens. Used as a moving average crossover, both lines are simple translations of the 20- and 50-day moving average, although with slightly different time frames.

1. The tenkan sen - Calculated as the sum of the highest high and the lowest low divided by two. The Tenkan is calculated over the previous seven to eight time periods.

2. The kijun sen - Calculated as the sum of the highest high and the lowest low divided by two. Although the calculation is similar, the Kijun takes the past 22 time periods into account.

3. senkou span A - The sum of the Tenkan Sen and the Kijun Sen divided by two. The calculation is then plotted 26 time periods ahead of the current price action.

4. senkou span B - The sum of the highest high and the lowest low divided by two. This calculation is taken over the past 44 time periods and is plotted 22 periods ahead.

Once plotted on the chart, the area between the two lines is referred to as the Kumo, or cloud. Comparatively thicker than your run-of-the-mill support and resistance lines, the cloud offers the trader a thorough filter. Instead of giving the trader a visually thin price level for support and resistance, the thicker cloud will tend to take the volatility of the currency markets into account. A break through the cloud and a subsequent move above or below it will suggest a better and more probable trade.

To Recap:

1. Refer To The Kijun / Tenkan Cross - The potential crossover in both lines will act in similar fashion to the more recognized moving average crossover. This technical occurrence is great for isolating moves in the price action.

2. Confirm Down / Uptrend With Chikou - Confirming that the market sentiment is in line with the crossover will increase the probability of the trade as it acts in similar fashion with a momentum oscillator.

3. Price Action Should Break Through The Cloud - The impending down/uptrend should make a clear break through of the cloud of resistance/support. This decision will increase the probability of the trade working in the trader's favor.

4. Follow Money Management When Placing Entries - By adhering to strict money management rules, the trader will be able to balance risk/reward ratios and control the position.

The Round Up
Intimidating at first, once the Ichimoku chart is broken down, every trader from novice to advanced will find the application helpful. Not only does it mesh three indicators into one, but it also offers a more filtered approach to the price action for the currency trader. Additionally, this approach will not only increase the probability of the trade in the FX markets, but will assist in isolating only the true momentum plays. This is opposed to riskier trades where the position has a chance of trading back former profits.

Adam Horak