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The Complete Ichimoku Trading Guide – How To Use The Ichimoku Indicator

The Ichimoku Cloud indicator is an all-in-one indicator that provides information about support/ resistance, trend direction and momentum all at the same time. The Ichimoku indicator is a potent trading tool, but many traders feel overwhelmed when looking at all the lines and information that the indicator gives them and then often misinterpret the Ichimoku signals. In this article, we will dissect the tool and show you step by step how to use the Ichimoku indicator to make trading decisions.

 

First step: taking the indicator apart

The Ichimoku indicator is made up of 2 different components:

1) The Conversion and Base lines: Those look like moving averages on your charts, but they are not as we will see

2) The Ichimoku Cloud: The Cloud is the most popular aspect of the indicator because it stands out the most.

 

everything

Please note that I am focusing on the momentum and trend-following aspects of the Ichimoku indicator for this article. The lagging span of the Ichimoku is left out by choice since it does not add much value.

We will now take a look at each component individually and then put it all together to help you find better trade signals.

 

Conversion and Base Lines

As I said earlier, that the Conversion and Base lines look like moving averages on your charts, but they do something different. The Conversion and the Base lines show the middle of the 9 and the 26 period high and low. This means that they look back 9 and 26 periods (candles), take the highest and the lowest price levels during that period and then plot the line in the middle of that range.

In the screenshot below, the green and the red line are the Ichimoku Base and Conversion lines. For comparison, I also plotted a 9 period moving average in white on the chart; the moving average is very similar to the Conversion line, but does not match it 100%.

 

Tenkan Sen / Conversion Line: The middle of the 9-period high and low

Kijun Sen / Base Line: The middle of the 26-period high and low

 

how to use the ichimuko indicator

 

Conversion and Base lines signals and meaning

The Conversion and Base lines have two purposes: first, they act as support and resistance during trends, just like moving averages. Secondly, they provide momentum information. When price is trading above the two lines and when the Conversion line is above the Base line, it signals bullish momentum. This is also very similar to moving averages: when the shorter moving average crosses above the longer moving average, it means that momentum is up and rising.

  • Base and Conversion lines act as support and resistance during trends
  • Only take buy trades when price is above the two lines and sell trades when price is below the two lines
  • A cross of the two lines confirms momentum
    • When the shorter line moves above the longer-term line, it means rising bullish momentum (and vice versa)
    • When price moves above the two lines, it confirms the momentum

 

The Ichimoku Cloud

The Ichimoku Cloud is made up of a lower and an upper boundary and the space in between the two lines is then often shaded either green or red. Let’s explore what this means.

The first and faster moving boundary of the Cloud is the average between the Conversion and the Base lines. The second, slower moving boundary is the middle between the 52 period high and low. An important characteristic of the Cloud is that it is projected 26 periods into the future.

Again, in the screenshot below we plotted two regular moving averages next to the Cloud and used an offset of 26 (shift the moving averages into the future). You can see that the moving averages are almost identical to the Ichimoku Cloud.

 

Seknou A – faster moving boundary: The middle between Conversion and Base Line

Senkou B – slower moving boundary: The middle between the 52-period high and low

Important: The Cloud is shifted 26 periods into the future

 

Could-1

 

Ichimoku Cloud signals and meaning

The general idea behind the Cloud is very similar to the Conversion and Base lines since the two boundaries are based on the same premises. First, the Cloud acts as support and resistance and it also provides trend direction and momentum information. But since the Cloud uses a 52 period component (as opposed to 9 and 26), it moves slower than the Conversion and Base lines.

Basically, the Cloud confirms an uptrend when price is above the Cloud and a downtrend when price is below the Cloud. The space within the Cloud is a noise zone and trading here should be avoided. A rally is reinforced when the Cloud is green and a strong downtrend is confirmed by a red Cloud.

The Cloud, thus, is a way to trade with the longer term trend and we can sum up our findings as follow:

  • Trend-following trading based on which side of the Cloud price is
  • The Cloud acts as support and resistance during trends
  • It’s a noise zone when price is in the Cloud

 

 

The Signals – how to use the Ichimoku indicator to find trades

Now that we have a solid understanding of what the individual components do and what their signals and meanings are, we can take a look at how to use the Ichimoku indicator to analyze price charts and produce trading signals.

 

  1. The Cloud: long term trend, resistance and color

With the help of the Ichimoku Cloud, traders can easily filter between longer term up and down trends. When price is below the Cloud, it reinforces the downtrend and vice versa. During strong trends, the Cloud also acts as support and resistance boundaries and you can see from the screenshot below how price kept rejecting the Cloud during the trend waves.

Thus, the Cloud is ideal when it comes to filtering between bullish and bearish market phases. However, as most momentum indicators, the Ichimoku Cloud loses its validity during range markets.

cloud-resistance

 

  1. The faster Conversion and Base lines signals

The Conversion and Base lines are the fastest moving component of the Ichimoku indicator and they provide early momentum signals. In the screenshot below we marked different points with the numbers 1 to 4 and we will now go through them to understand how to use the Conversion and Base lines:

signals-1

 

1) The Conversion line crosses above the Base line which is a bullish signal. At that time, price was also trading above both lines which confirms the bullishness. Price dipped back into the Cloud for a moment, but found support. This could have been seen as an entry.

2) Price started to violate the Base line (yellow) which is a warning signal of a trend shift. The Conversion and Base lines also crossed into a bearish setup, further confirming the momentum shift. Finally, price entered the Cloud validating the change.

3) Price strongly crossed below the Conversion and Base lines and the Conversion line also crossed the Base line; both are bearish signals. At the same time, price was trading below the Cloud. All those signals confirm a strong downtrend and could have been used as a sell entry.

4) Price started to violate the slower Base line which is an early warning signal. Then, the Conversion and Base lines kept crossing each other, which further confirmed that momentum was shifting. Eventually, momentum died off and price consolidated sideways.

 

 

  1. RSI and creating confluence

We are all about generating confluence which means combining different trading tools and concepts to create a more robust trading method. Our preferred indicator is the RSI and it works together with the Ichimoku perfectly.

When using the Ichimoku indicator to ride trends, it’s important to understand when the trend is over and when a potential reversal signals a trade exit. The screenshot below shows that by adding the RSI and looking for RSI divergences, it is possible to identify high probability reversals. If, after a RSI divergence, price crosses the Conversion/Base lines, a reversal is very likely and it can even foreshadow a longer trend reversal into the opposite direction.

 ichimoku-RSI

 

  1. Stop placement and exiting trades

Just as moving averages, the Ichimoku indicator can also be used for your stop placement and trade exits. When exiting a trend-following trade based on the Ichimoku signals, there are a few things you should know:

  • When, during a downtrend, price crosses above the Conversion and Base lines, it can signal a temporary shift in momentum…
  • …but as long as the Cloud holds as resistance, the trend has not yet been broken.
  • When price breaks above the Cloud, the downtrend is finally over.
  • Traders can use the Ichimoku for conservative and aggressive trade exits:

The conservative exit (1): A more conservative trader would exit his trades once the Conversion and Base lines cross into the opposite direction of the ongoing trend. Such a trader usually avoids a lot of the choppiness that exists before reversals happen. On the other hand, he might miss on future trend moves when price reverts back into the original direction; not all Conversion-Base line crosses lead to trend reversals.

The aggressive exit (2): A trader who wants to ride trends for a longer time exits his trade only once price breaks the Cloud into the opposite direction. The advantage is that he can sometimes hold trend trades much longer and is not as vulnerable to temporary retracements. On the other hand, he might exit some of his trades too late and could end up giving back a substantial amount of his profits because the Cloud-cross usually happens very late.

 signals

 

Conclusion: The Ichimoku indicator is a solid trading framework

Overall, the Ichimoku framework is a very solid, all-in-one indicator that provides a lot of information at once. As we have shown, there is no secret when it comes to using and interpreting the Ichimoku indicator and the individual components are very closely correlated to trading based off of moving averages. Nevertheless, the Ichimoku indicator definitely has its place and traders who decide to follow such a trading strategy can create a robust framework. We also highly encourage to combine the Ichimoku indicator with other tools such as basic support/resistance principles, price action and chart pattern reading and, potentially, other indicators.

To sum it up, here are the most important things you have to know when it comes to trading with the Ichimoku indicator:

  • Use the Cloud to identify the long term trend direction. Only trade in the direction of the Cloud.
  • The Cloud also acts as support and resistance during trends. But when price enters the Cloud, it signals a shift in momentum.
  • When the Conversion line crosses above the Base line, it can signal the shift towards a bullish trend
  • During a trend, the Conversion and Base lines act as support and resistance
  • Only trade in the direction of the Conversion and Base lines
  • A trader can either use the Conversion/Base lines for his exits (conservative), or exit when price breaches the Cloud (conservative)
  • During ranges, the Ichimoku indicator loses its validity

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17 comments

  1. Shravan Dharmaraj

    ichimoku is such an underused tool in technical analysis.. Thank the japanese for this powerful indicator. We have so much to learn from them in the field of technical analysis and trading in general

    • what exactly is there to learn from the japanese market except for the massive failure that interventionism on behalf of its destructive central bank & kamikaze government policy has on its own economy? Not to mention being arguably the first country to kick-start the race to the bottom global currency war? The BoJ has destroyed their bond market but that wasn’t enough, it is now in the Top 10 shareholders in 90% of the Nikkei 225…how’s that for free market capitalism for you? You are correct about the learning part though, in the case of Japan, learn exactly what not to do!

  2. Rolf,

    Does ichimoku works for certain pairs and doesn’t work for certain pairs? I am big fan of Ichimoku and read and trade with that indicatior lot. but my monkey mind jump to other strategy or combine other strategy with ichimoku and loose the trade.

    Thanks for posting this article and bring my confidence back.

    Rick

    • Hi Rick,

      the Ichomoku indicator is based on price averages and price highs/lows. Therefore, the indicator is applicable to all pairs and markets because it always adjusts based on the price action of the individual market.

      Hope that makes sense 🙂

      Rolf

  3. Thank you for this wonderful piece on Ichimoku. I’ve been trying out this tool on demo (and live) accounts to some degree of success and it’s refreshing to read your comprehensive guides.

    May I seek your thoughts on the following:
    – Would you say Ichimoku is preferrably used on higher timeframes (H4 or higher)?
    – The lagging span (Chiku span) is left out by choice in your article. What exactly makes it not as valuable as the other components of the tool? Could it be used as, say, a confirmation whether to enter a trade?

    Once again, I much appreciate your time and effort. I truly enjoy reading your website.

    • Hello Xadiq,

      You can use the indicator on all timeframes. Since it’s based on price action, it’ll adjust automatically. I always prefer the 4H, but those are all universal concepts.
      I think the other components of the Ichimoku offer a lot of information and the lagging span did not add much value. The rest should be more than sufficient.

      Rolf

  4. Ichimoku is to pro traders, what a saw and a hammer is to carpenters 🙂

  5. i’ve been told that the bullish cross is only valid if happens above the cloud and vice versa for the bearish one… is it true?

    • It’s not about VALID or INVALID. It’s about WEAK and STRONG. Any signal given is always VALID in the sense that it means something. But it may not be a STRONG indication of trend change. it’s about probabilities. There are websites out there that rate the signals . . . for example . . . a cross can be below the cloud, in the cloud, above the cloud. The first is less bullish than the last.

  6. I have been studying the Ichimoku trading patterns and havea fundamental question

    Since the cloud is projected forward do I consider the forward cloud while making decisions on the current price or do I consider the cloud where the price is currently at

    for eg the forward cloud shows a crossover while the cloud where the price is currently residing does not. Do I make a decision based on the forward cloud or the current one.

    • Other websites discuss this. Do a search. Generally, if the cloud turns bullish, it’s supposed to be an indication that the current signal is bullish. Vice versa.

  7. Good article on Ichimoku. However, I’m not sure that Ichimoku is necessarily a better tool than, let’s say, a 20 SMA and/or 50 SMA. The Cloud seems very, very delayed to me. I’m not sure all that delay is necessary.

    Furthermore, a breakout from a cloud is no more guaranteed to continue than a breakout from a moving average.

    So when you combine that with the delay . . . I’m not sure Ichi is such a good thing.

  8. BTW . . . the 89 SMA will give the same signal as the Cloud. So that gives you an idea of the delay involved. Rolf, for example, recommends using a 20 SMA to enter reversal trades. We’re talking over four times the delay.

  9. Hi guys, brilliant article. Big fan of all your stuff, well explained and to the point.
    Question on Ichimoku: Does the above work equally well on equity indices or commodities as compared to FX in your experience?

    • Hello Vee,

      thanks and glad you liked the post. I have no experience with using it on single equities but it does also apply to commodities and indexes.

      Regards
      Rolf

  10. hi Rolf,

    For the RSI divergence u are plotting it over price action vs the RSI ,so why u said Ichimoku and RSI are best combination .As i can see we dont need Ichimoku here for the divergence.Pls share .

    And i like ur articles a lot ,keep it up

    • Hello Gurwin,

      I just want to share different tools. You don’t even nee the RSI if you know how to read price. Every trader prefers something else so my goal is it here to explain different tools and then let traders choose what they feel most comfortable with.

      Rolf

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