The Ichimoku Cloud is a form of technical analysis that was developed by a Tokyo newspaper writer in the 1960s. The cloud patterns of Ichimoku give you an instant idea on-trend and direction in the markets. It uses moving averages to define support and resistance zones, identifies trends and direction and also helps to gauge the momentum of price action.
Ichimoku not only uses the cloud to define support and resistance but it also uses the Kijun, Tenkan and Chikou lines that are very similar to moving averages and can help to provide bullish or bearish forward indicators.
Learning the Cloud
Initially, start off by learning the names associated with the indicator:
The top and the base of the cloud act as support and resistance, but the cloud itself also determines trend: above the cloud is considered a bullish signal, below the cloud is bearish and within the cloud, there is no prevailing trend.
Examples: Ichimoku Cloud
The tankan and Kijun lines are also useful to support and resistance levels and they can be used to determine bullish or bearish signals and their associated strengths.
Bullish Signals using Ichimoku analysis:
If price action is below the cloud and if none of the above occurs then the signal could be weak, for example, if the tenkan crosses below the kijun when it is above the cloud even if the chikou line is above the cloud it suggests the bullish trend may be weakening.
Examples: Strong bullish Signals
If none of the above occurs then the signal could be weak, for example, tenkan crosses over kijun from above and it occurs below the cloud and the chikou is below the cloud, but the price action is above the clouds.
Examples: Strong Bearish Signals