Shrewd traders are generally on the lookout for strategies that can maximize profits and minimize losses. These strategies pop up every quite often. Some old ones have nonetheless retained their relevance over the years. An outstanding example of these is the Ichimoku Cloud Indicator. Pay attention to the discussions that follow to know more about it, how to trade crypto with Ichimoku cloud, and the benefits you stand to accrue from it.
Ichimoku Cloud, say what?
Also called Ichimoku Kinko Hyo, this is a Japanese universal technical indicator that was developed in the 1940s. It was created by Goichi Hosoda, who was a journalist.
The term “Ichimoku Cloud” was coined by traders who used the platform due to its semblance of clouds. “Ichimoku Kinko” is a Japanese term for ‘balance at a glance.’ This designation accurately describes the core of the strategy.
Indeed a single peek into the chart is sufficient for the trader to behold a more vivid picture and take a confident step thereafter.
This platform relates well to the impulse indicators in that it determines the intensity of the price movements. This has made it to garner the status of the classic indicator. Also, it has become popular and widely used by traders the world over.
Role of the Ichimoku Indicator
This is a multipurpose indicator that applies to a range of cases. It was created by a Japanese trader in the 1860s. At that time, the traders of rice in Japan who had a presence in the stock exchange came up with candlesticks to showcase the prices on the charts.
Ichimoku Kinko Hyo denotes three indicators on the price charts:
- Price momentum (the intensity of the fluctuations of the price)
- Support and Resistance zones
- Direction of the trend
It further comprises the following four components:
- Tenkan-Sen (blue line)
- Kijun-Sen (red line) of local maxima and minima (highs and lows)
- Chikou Span (brown or green) line
- Kumo (cloud)
We belabor them as follows:
It is the first of the Ichimoku indicators and bears a blue marking on the chart. Tenkan-Sen also goes by the name conversion line. It epitomizes the average value of the price maxima (high) and minima (low) readings over given N candles.
As a general rule, its default setting is 9 days. This 9-day setting bears semblance to the 9-day simple moving average but is nonetheless smoother.
The line stands apart in that it signifies whether there is a distinct trend. That means it falls flat when the price is falling flat and vice versa.
When this line is moving, it signifies a similar move over the same 9-day period. This sets it apart from the SMA indicator. It is advantageous in the sense of indicating the support or resistance levels as well as the direction of the trends.
As such, it is highly versatile.
It bears a red marking and is technically referred to as the baseline. This bears much semblance to the Tenkan-Sen and is computed from the average values of the minima and the maxima over a given period.
The indicator is generally longer by 26 days.
Chikou Span denotes the price with a precise lag. Automatically, the period is fixed to 52 days. It also points out distinct trends on the market as well as the associated directions.
Kumo endeavors to establish the equilibrium between the resistance and the support. At this time, it also takes into account the price dynamics of the previous trading periods.
Generally speaking, the more you use it, the more accurate it becomes. It is further subdivided into the green and the red zones respectively. These two zones indicate the downward and the upward trends in that order.
Kumo is a member of the “leading indicators” and exists far beyond the last candle in the chart. Amazingly, its most significant aspect is the area of the movement. This is because traders tend to avoid assets whose prices vary markedly within the cloud.
Whenever the price action is in the cloud, no clear trend on the Bitcoin chart exists. No sooner though, than the price moves outside of Kumo, a strong trend pops up.
Ichimoku Cloud Strategies
One of the most popular strategies among the traders who trade with the Ichimoku cloud is to act upon the point at which the conversion line (Tenkan-Sen) crosses the baseline (Kijun-Sen). This is pretty similar to the moving average.
How does it work?
The point at which the blue line (Tenkan-Sen) intercepts the red line (Kijun-Sen) in the upward trajectory, ushers the traders in a Long position.
On the other hand, if the blue line dips below the red line, a reversal or drop in the price level occurs. This spells a Short signal.
In as much as the strategies that employ more components are critical, various tests have to be carried out to ascertain the one that works best.
It is sufficient for a trader to peek into this indicator to comprehend the possible price movements, whether a trend exists or not, the support levels, and the price resistance.
For these reasons, the indicator is deemed universal. By far the most dependable buy signal appears when the lagging Shikou Span line breaks above the Kumo Cloud. The reverse pattern showcases a bearish trajectory that exists in the market.
The Chikou Span line breaking through the Tenkan-Sen line in a downwards movement is a signal to stop all trading. Traders look at price action above or below the cloud, such movements can point either to an up- or downtrend.
PROs and CONs
Ichimoku Cloud PROs
- Highly versatile – It may be devoted to the detection of trends, determination of their directions, support of the levels of resistance, and the price dynamics intensity.
- Simple – The cloud may be automated using the 3commas bots as explained in the Mastering Passive Income course by The Better Traders. Also, it is relatively simpler to make use of, regardless of the skill level of the user concerned i.e. beginner or professional.
- Compatible – This platform may be combined with a couple of other indicators like RSI, MACD, and MA to yield a comprehensive approach. The approach goes ahead to get rid of unnecessary noise in the trading environment while also bolstering the efficacy of the trading signals.
Ichimoku Cloud CONs
- Complicated – Starters will find it somewhat complicated and confusing at first to trade with Ichimoku cloud. The reading and the interpretation of the signals may be particularly misleading. These two potentially lead to many mistakes.
- Squeezed – The use of too many lines at the same time may confuse inexperienced traders. Nonetheless, this is pretty easy to fix. If you are familiarizing yourself with the indicator, you may attempt different strategies in the lines and the clouds exclusively. In this manner, you will slowly get to learn about the tenets of the indicator while also testing the strategies.
This cloud strategy can convert any trader into a real crypto shogun. Traders who trade with Ichimoku cloud generally stand to find many uses for these strategies that are based on the Ichimoku Cloud. Over and above these, it is a lot simpler to merge various indicators and bots and use them alongside automated trading as covered in one of The Better Traders crypto trading courses.