How To Read The Ichimoku Cloud Charts Properly

The Japanese Ichimoku cloud charts have gained a lot of popularity amongst technical analysts and traders in recent years, and this is due to their ability to be profitable in the marked trend phase of the underlying market.

One of the major benefits resulting when we define a trend through the Ichimoku cloud charts compared to the traditional analysis based on a trend line, is the lowest frequency of false signals generated by the Ichimoku technique.

The Ichimoku charts are a combination of technical indicators able to define a market trend, a technique that can be superficially defined as quite similar to a following trend model based on the moving averages, but with precise temporal filters that reduce the above mentioned false signals.

Let’s take the bull market of NzdUsd, for example in the chart below. The weekly scale graph shows two false bearish break signals of the up trend line started in 2009. According to the Ichimoku graphical technique, instead, the bearish signals would have never occurred, and this effectively denies the information generated by the classic technical analysis. Only in June 2012 NzdUsd came very close to formalize a long-term bearish signal as:

  • the price was positioned under the cloud;
  • the leading span 1 was lower than the leading span 2;
  • the conversion line was lower than the base line;

but one item was still missing to the call from a traditional ichimoku signal.

This is the essential condition to formalize a bearish signal via a lagging span (red dashed line equal to the current spot price back of 26 days) lower than the closing price of that day. When the signal was not occurring on the NzdUsd in the same week, this once again has helped ichimoku traders to avoid a false signal.


Ichimoku Chart Example


All traders who use the Ichimoku technique take advantage of the charts to identify the short term momentum, the long term trend, and possibly, the price targets of a specific technical movement.

Especially on the weekly and daily time frames, we can get some signals able to capture the birth of the primary trends with a time horizon longer than 6 months, while on daily time frames, we just obtain signals that can hardly boast an operational value greater than 1-3 months. Obviously, the ideal combination for a trader is the one that is able to associate a bullish / bearish signal on a weekly scale to a similar signal on a daily scale.

Let’s now check a concrete example of the power of the Ichimoku cloud charts analyzing the recent exchange rate trend of UsdJpy (where the signals on the weekly charts are very rare, but very effective).

In 2007, a signal on UsdJpy was generated. Since then, the clouds have virtually denied every attempt at a trend reversal and, above all, they have filtered the large number of false signals that the classic trend line breaks had generated by the ichimoku cloud demonstrating key support and resistance levels.

Let’s see now what happened in 2008 and 2010 when UsdJpy broke its own downward trend line that joined the decreasing tops; this technical movement deceived traders about a trend reversal that did not really happen in the end.

On the contrary, if they had used the technique based on the Ichimoku clouds (which did not confirm the trend reversal), then they would have had the chance to increase the short position of UsdJpy generating important profits across several months.

But let’s come back to more recent times. In mid-November 2012, a bullish signal on UsdJpy was provided by the technique based on the Ichimoku clouds.


Ichimoku clouds


At that time, all UsdJpy prices were positioned above the cloud, the conversion line (brown) above the base line (blue), the leading span 1 (green) was higher than the leading span 2 (red) therefore in a bullish position and finally the lagging span (purple), for the first time since 2007, above the cloud and above the closure of the twenty-sixth day before.

This was the event that all the traders fond of the graphic charts based on the Ichimoku technique had been waiting for years which is called a kumo break: from this fact a clear long-term bullish signal on UsdJpy emerged.

At that point, the trader only had to look for a confirmation from the daily charts to put in place all the data.


Ichimoku bullish signal


In fact, even on this time schedule, the bullish signal was there without a doubt; this was the green light needed to exit from the short positions of UsdJpy accumulated over the years, beginning to open heavy long positions instead.

The following weeks have done nothing but confirm the correctness of the UsdJpy bullish signal along with the tenkan kijun cross signal.

At this point, all the traders have to do is to use the technique of Ichimoku and price action (video explaining Price Action here) to manage the long position open in November 2012, define the primary supports of the market and act accordingly (by increasing the positions) in the event of retracement of the market, obviously until when the new bearish signals on the weekly charts will formalize the end of the uptrend in progress.

Comments are closed.