Ichimoku Explained in 5 Minutes
Here’s a technical indicator that is guaranteed to impress. Tell people you’re using this, and they’ll bow down to your advanced technical know-how.
Show them your charts and they’ll squint a bit, and probably worship you as some kind of trading demi-god.
What I’m trying to say is that they look and sound bloody cool. But do they make money?
The indicator I’m talking about is the Ichimoku cloud. Even the name of it sounds like it should be accompanied by a strum on the Japanese harp, and someone bowing to me!
What puts most people off using Ichimoku is that it looks so complicated. But, I’m going to show how simple it is – in fact, I’m setting myself the challenge of turning you into an Ichimoku trader in just five minutes. Here goes …
Ichimoku in five minutes
Okay, take a look at that chart above. Here are the things you need to know.
– The cloud (that’s the area shaded in red or green) – if the price is above the cloud, we’re looking for an uptrend and are taking buy signals. If it’s below the cloud, we’re anticipating a downtrend and are looking for sell signals.
– There are two special Ichimoku moving averages on this chart – the fast one is the red line, which follows close to the price. The slow one is the blue. We’re looking for a basic moving average crossover from these. If the fast one crosses below the slow one, we Sell. If the fast one crosses above the slow one, we buy.
– One more filter on this … see that purple line? (I’ll tell you more about this line in a minute.)
Let’s look at some signals …
The first signal here comes when the price breaks below the cloud, and the red moving average is below the blue moving average. This is a sell. The signal to close this comes at A, when the moving averages cross again (I’ll explain in a moment how the purple line can signal a close too).
The second signal is a buy, where the price breaks above the cloud and, shortly afterwards the red moving average crosses above the blue moving average. This trade is then signalled to close at B, where the moving averages cross back. (Again, there’s another close signal from the purple line – I’m getting to that bit).
So far, pretty simple – it’s just a moving average crossover strategy, with the cloud acting as an extra filter.
Now I’ll explain how we use that purple line …
The chart above is an historical one, which makes reading the purple line tricky. Here I’ll show you what the purple line looks like on a live chart …
As you can see, we’ve got a signal to buy at A, where the price breaks above the cloud, and the fast moving average is above the slow moving average.
Note that the purple line is lagging behind the current price level. This is because the purple line plots nothing more complicated than the current price, but 26 candlesticks back. So, by following this line, we can see where the current price is in relation to where it was 26 candles ago.
In a buy trade, we want to keep that purple line above the price action.
In a sell trade, we want to keep that purple line below the price action.
So, in the example above, our buy trade can stay open until the moving averages cross back again, or until the purple line crosses below the candlesticks.
Okay, so here’s a summary of our Ichimoku method …
– We get a signal to buy if the fast moving average (red) crosses above the slow moving average (blue). We get a signal to sell if the fast moving average (red) crosses below the slow moving average (blue).
– We will only take a buy trade is the price is above the cloud. We will only take a sell trade if the price is below the cloud.
– We will only take a buy trade if the purple lagging line is above the current price. We will only take a sell trade if the purple lagging line is below the current price.
– We will close a trade when the moving averages cross back over, or if one of the other filter criteria negates our trade (i.e. if the price moves into the cloud, or the purple lagging line crosses the price).
And that’s it – Ichimoku on a plate!
Now for some more stuff about Ichimoku …
Depending on the charting software you’re using (the images I’ve taken here are from IG’s charts, which just allow you to drop in Ichimoku indicators), the colours of the line may be different.
Here I’ve just used ‘moving average’ and ‘lagging’ to describe them, because I find it easier to understand them in a language I understand, but they’ve all got proper Japanese names which, admittedly, sound a lot more impressive.
The fast moving average (red on my chart) is called ‘Tenkan Sen’
The slow moving average (blue on my chart) is called ‘Kijun Sen’
And the lagging line (purple on my chart) is called ‘Chikou Span’
The Ichimoku system is not (I’m sorry to say) an ancient Japanese art – it was actually developed in the 1930s by a Tokyo journalist. However, it was quickly adopted by many Japanese trading rooms because of the sophisticated price tests it offers – indicating support and resistance, identifying trends, etc – in such an easy-to-read format.
Many traders are completely intimidated by Ichimoku charts, but I hope I’ve showed here that there’s nothing to be scared of! And there’s plenty of sound trading information to be gleaned from them.
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21 comments
Pablo
We should also add as an entry criteria that the kumo should present upwards signs (Senkou-span A above Senkou-span B or green cloud) for long and downwards signs (Senkou-span A below Senkou-span B or pink cloud) for short.
Mark Rose
Hi Mike, sorry for being slow to respond – I missed your comment. There should be two lines which form the cloud (these are normally called the chikou span A and B) – this should look like a ‘cloud’ rather than two lines, but that’ll depend on your chart set-up. Then you’ve the fast and slow moving averages (Tenkan Sen and Kijun Sen). And finally, the Chikou Sen, which is the lagging line (the purple one on my chart). Hope that helps – please let me know if you’ve any more questions (and I’ll try to reply more promptly!)
Mike
Mark, very interesting, thank you. However, maybe I’m a bit confused because on MT4 indicator for Ichimoku there’s a fourth indicator – Chikou Span – what’s this ??
Geoff
I was introduced to Ichimoku several years ago when I was an investor looking to use technical analysis. The presenter described it as a lagging indicator, and more lagging than most. To use it as a trader I think you would have to be looking at daily charts as a minimum, possibly weekly.
Mark Rose
Hi Johan, pleased that you’ve found the write-up useful. Yes, we’d be looking for the moving averages to have broken beyond the cloud before taking a trade. In theory, Ichimoku could be a stand-alone indicator, but with any well-known trading method, it’s good to get a step ahead of what the ‘crowd’ is doing, so I’d recommend finding your own take on it. Something like MACD is, again, using moving averages, so you might be better looking for a candlestick confirmation (like engulfing candles to confirm a move or signal that it’s running out of steam) or a leading indicator.
Johan
Mark, should the moving averages also have broken above or below the cloud before a trade is taken ?
Johan
Hello Mark, Thank you for this Ichimoku write-up. A trading friend of mine who successfully uses it, has been urging me for some time to really have a look at it, and your write up has done just that. Am I right in saying that you can use this as a lone-standing indicator ? That you need nothing else on your charts ? Like MACD, maybe ?
Andy
Hi Mark
Very interesting, thank you. What settings do you use for the fast and slow MA’s? Also, what settings do you use for the cloud?
Thanks, Andy
Mark Rose
Hi Andy, I’ve used settings 9/26/52. Cheers, Mark
Felix
Does anyone spot any nice set up using this Ichimoku, say on daily frames? There’s some I spotted today but not sure they qualify:
1. NZ$/US$ (below cloud but Tenkan sen is lower or on same level than purple line);
2. US$/Yen (abv cloud but Tenkan sen is higher than purple line)
3. Eur/Gbp (below cloud & has been downtrend for weeks now)
Felix
sorry, the US$/Yen pairing was meant for H4 TF & even then, Tenkan line is currently below Kijun; so this setup looks invalid at the moment.
Chris
Hi Mark, can you clarify the value of the purple line in relation to its position, please. If it is the current price it is never going to be above or below the current candle so are we saying that the trigger to buy or sell is if the current price is above or below the candle situated 26 previous steps away and which must always be the case if we are in a upward or downward trend and the cloud has shifted to above or below.
Mark Rose
I’ve realised why I’m causing confusion – I’ve said ‘current price’, when I mean ‘price action at that time’. Chris, what you describe is correct and I’ve amended my copy in the text to make it clearer. Thanks to you and David for keeping me on my toes!
Chris
Hi Mark, correction to last post. Purple line’s historical reference can sometimes be lower than relevant candle thus signifying no trade and not as I originally thought. Apologies for any inconvenience.
Chris
Thanks for response Mark. Just left wondering what value the purple line has now in view of whatever asked of it is automatically done anyway.
David
When you say the lagging is to be above or below the current price do you mean that it should be clear of any candlestick?
Mark Rose
Strictly speaking, as long as it’s above or below the current price, that should be enough
David
Perhaps I have misunderstood this ,I thought the lagging line was the current price only 26 bars behind
David
Mark Rose
Sorry David, I’m confusing myself! Yes, it needs to be above or below the price action 26 bars behind – i.e. above or below that candlestick. (Ignore my previous comment!)
Vasant
Very happy to read this.I will call it,”Ichimoku trading made simple -by mark Rose.
Thanks again
Mark Rose
Hi Vasant, I’m pleased that you found it helpful. Mark