Ichimoku Cloud Trading System for Beginners (2024)

What Is the Ichimoku Cloud Trading System Strategy?

The Ichimoku cloud trading system is a popular technical analysis indicator and strategy. It consists of 5 plots: the Kumo cloud, Tenkan-sen line, Kijun-sen line, Senkou Span A, Senkou Span B, and the Chikou Span.

The data plots are based on the average of the high and low over a specific period. Therefore, these data plots are different for each line. However, notice that the lines are similar to exponential moving average lines, which traders use to make trading decisions.

If you want to learn the Ichimoku cloud trading system, our video on Ichimoku trading strategies for beginners will be great. This is a popular Japanese indicator that’s incredibly powerful when stock trading. In addition, many traders and investors use it for day trade, swing trade, and investment. Watch our webinar above for an in-depth overview of how this trading indicator works.

The Ichimoku system quickly and easily shows support and resistance, displays a stock’s momentum, identifies the trend’s direction, and offers trading signals. We are huge fans of this system and refer to it repeatedly.

Let’s take a quick look at the silver lining in this cloud.

The Ichimoku Cloud trading system consists of five chart plot lines total:

1. The tenkan-sen or Conversion line calculates the 9-period high and the 9-period low, then divided by 2.
2. Kijun-sen line or Base Line – calculated by taking the 26-period high and low and dividing the numbers by 2.
3. Senkou Span A or Leading Span A – this cloud line is created by taking the Conversion Line and adding the Base Line, then dividing by 2. It’s called the leading span because it looks ahead 26 days to provide a floating cloud ahead of the stock’s current price.
4. Senkou Span B or Leading Span B is calculated by taking the 52 periods high, adding the 52 periods low, and dividing by two again. This line forms the lower part of the cloud, moves slower, and is also 26 periods ahead.
5. Chikou Span or Lagging Span – This line was plotted 26 days ago; hence, it is a lagging line or indicator. Some people don’t use this line because it’s in the past.

Pay attention to when candlesticks charts are trading sideways inside the cloud. This means the trend is undefined, neutral, and potentially riskier. This could be consolidation or setting up for a move above or below the cloud.

The two spans create a red or green cloud, depending on which span is on top and which is on the bottom. Clouds also appear on your charts, giving you an idea of future support and resistance levels!

Different parts of the cloud show support and resistance areas. Support and resistance are key in trading.

Let’s discuss the Conversion line and Baseline; these lines (Blue and Red, respectively) can help traders and investors find entries and exits while trading with the Ichimoku cloud trading system. They are important for determining the stock’s momentum and timing entry and exits.

It is important to note where we regard the cloud location, especially considering the conversion-base line pair. The trading signals these lines give us will be reinforced if these lines are above or below the cloud.

There were some neutral consolidation periods but not much red cloud creation. Note how the Conversion line is the first support line, followed by the Baseline.

Traders and investors use the TK lines to trade the momentum! Can you see how simple this system is and why it is so popular in our community!? First, learn how to find support and resistance in our trading room. Then, check out the trading service that we offer.

Look at the example of $AAPL above. We have several Conversion lines, Baseline crossovers, also known as TK crossovers (Tenkan-sen and Kijun-sen crossover):

As you can see, we have three bullish TK crossovers, accompanied by Kumo breakouts (cloud breakouts where price busts through the cloud). These breakout Ichimoku trading signals were great and reinforced by the overall bullish cloud uptrend of $AAPL.

Trading the Ichimoku cloud trading system is simple and fun because it’s an all-in-one indicator that produces concise trading signals. Here is how you trade it:

1. Identify whether the price is above, below, or inside the Kumo cloud
2. Watch the Tenkan-sen or conversion line and Kijun-sen base lines location.
3. Define the overall trend using the cloud
4. The next step is to find your entry

1. Wait for consolidation or pullback to the cloud support for ideal entry.
2. Go long when you see a bullish TK crossover.
3. Go short with a TK crossover to the downside if the consolidation or pullback period fails to hold

This shows the beginning of a potential trend reversal. Look into popular trading strategies such as gap-and-go techniques, dip buying strategies, and day trading options. Ichimoku can work as a complement to all types of trading strategies.

Let’s summarize the Bullish and Bearish signals in the Ichimoku cloud trading system:

Bullish Signals

1. Price (candlesticks) breakout of the cloud to the upside (to the overall trend)
   Cloud converts from red to green
2. Price action moves above the Base Line or Kijun-sen Line
3. Conversion Line moves above Base Line or (TK crossover)

Bearish Signals

1. Price moves beneath the Red or Green cloud.
2. The cloud turns green to red (possibly forming a new bearish trend!)
3. Price Moves below Base Line or Kijun-sen Line
4. Conversion Line moves below Base Line (TK crossover to the downside)