Among the several options trading strategies available, the Ichimoku Cloud strategy has attracted traders’ attention due to its ability to provide valuable insights into potential market trends.
Developed by Japanese journalist Goichi Hosoda in the late 1960s, Ichimoku Cloud offers a versatile and holistic approach to market analysis.
This article explores how the Ichimoku Cloud strategy can be used to make informed decisions and enhance trading success.
What is the Ichimoku Cloud Strategy?
The Ichimoku Cloud strategy is a comprehensive technical analysis tool used to identify potential trend reversals, support and resistance levels, and overall market direction.
The term “Ichimoku” means “one glance” in Japanese, reflecting the strategy’s ability to provide a holistic view of the market with just a glance at its chart.
The strategy integrates multiple indicators to offer a more in-depth understanding of market conditions than individual indicators alone. The key components of the Ichimoku Cloud include:
- Tenkan sen (conversion line)
- Kijun sen (base line)
- Senkou span A and B (leading span A and B)
- Chikou span (lagging span)
READ: How to Use Moving Average Strategy for Options Trading
How Ichimoku Cloud Works
As stated earlier, the Ichimoku Cloud strategy integrates several components to provide traders with a comprehensive view of potential market trends, support and resistance levels, and entry/exit points.
Here’s a breakdown of how the Ichimoku Cloud strategy works:
Tenkan-sen (conversion line)
This is the shorter-term moving average and is calculated by averaging the highest high and lowest low over a specified period, often 9 periods. It reflects the short-term momentum in the market.
Kijun-sen (base line)
The Kijun-Sen represents the medium-term trend and is calculated similarly to the Tenkan-Sen but over a longer period, typically 26 periods. It provides a broader perspective on the market’s momentum.
Senkou span A and B (leading span A and B)
These are future-oriented components, forming the edges of the “cloud” or “kumo.” Senkou Span A is calculated by averaging the Tenkan-Sen and Kijun-Sen and projecting it 26 periods into the future.
Senkou Span B is calculated in the same way but over a more extended period, typically 52 periods. The space between these two spans creates the cloud, which represents potential support and resistance zones.
Chikou span (lagging span)
This element is the closing price plotted 26 periods back on the chart. It helps traders identify the current trend’s strength and potential reversal points.
The interplay between these components forms the basis of the Ichimoku Cloud strategy. When the market price is above the cloud, it indicates a potential bullish trend, while prices below the cloud suggest a possible bearish trend.
In addition, crossovers between the Tenkan-Sen and Kijun-Sen can signal trend changes.
Ichimoku Cloud Strategy Examples
Here are examples that show how to use Ichimoku Cloud:
Example 1
The image below shows a GBP/CAD chart. Using the Ichimoku, the trader predicted short-term price movements. At 16:58, the Senkou Span A and Senkou Span B crossed over, turning the area from red to green.
Coupled with rising Tenkan-sen and Kijun-sen, this signals a strong opportunity for Trader A to go long. Consequently, they initiate a long binary options contract on GBP/CAD at 1.57860, using a short-term, five-minute contract for this strategy.
Example 2
From the chart below, the trader aims to profit from Terra 2.0 after its 2022 price drop, using the Ichimoku strategy.
Observing LUNA’s price spike to 2.4660 at 19:04, the trader noticed the Chiku span resistance near 2.4680, backed by an earlier spike at 18:41. The trader then opened a short position at 2.4645 using a five-minute binary options strategy.
Example 3
The chart below is a Ripple (XRP) chart which the trader analyzed using the Ichimoku cloud for long-term price predictions.
After a significant price drop at 22:16, the trader observed the Ichimoku cloud’s future signal (red-shaded area) to anticipate a continued decline. With XRP priced at 0.4555, the trader decided to open a short position using a 10-minute binary options contract.
READ: Relative Strength Index Trading Strategy
How to Set Up the Ichimoku Cloud Strategy
Here are steps to follow to set up the Ichimoku Cloud indicator for binary options trading. In this case, we will use Quotex.
Sign in
Sign in to your binary options account. It’s advisable to start with a demo account so that you can understand the Ichimoku strategies and identify the most effective signals for your chosen assets.
Add the indicator
After signing in, add the Ichimoku indicator to your preferred asset’s chart. Locate the indicator group tab on your broker’s platform and choose “Ichimoku” or “Ichimoku Cloud.”
Some brokers offer tutorial videos and PDF guides to help you use these indicators.
Most platforms allow users to customize values and colors in the Ichimoku indicator. However, be careful when changing the values for the graph, as it requires a deep understanding of trading and the indicator.
Monitor the market
Keep an eye on market movements using the Ichimoku indicator. Look for signals like candles overlapping with the cloud or moving in sync with various lines.
Place a trade
Optimal timeframes for Ichimoku strategy often involve short to medium-length contracts, like five-minute options.
READ: Moving Average Convergence Divergence (MACD) Trading Strategy
Conclusion
The Ichimoku Cloud strategy, with its unique combination of indicators, provides a comprehensive view of market conditions. Traders can leverage this strategy to identify potential entry and exit points, manage risk, and enhance their overall trading performance. The visual representation that the cloud offers, along with its various components such as the Kijun-sen, Tenkan-sen, and Senkou Span, provides traders with a holistic overview of market sentiment and trend strength. However, the Ichimoku Cloud strategy is not a one-size-fits-all solution, but rather a versatile framework that traders can tailor to their unique preferences and risk tolerances. With its roots in Japanese charting techniques, this strategy has gained global recognition for its ability to provide a comprehensive and in-depth analysis of the markets.
