Trade Like a Samurai: The Detailed Guide to Using the Ichimoku Cloud Strategy

The Ichimoku cloud indicator may appear difficult to understand because it has so many parts.

However, once you understand its components and how to use it, the Ichimoku cloud strategy can be very useful in identifying resistance, support, and trends.

The Ichimoku cloud indicator is a technical indicator that shows momentum, direction, volatility, support, resistance, and possible reversals in price trends.

As a result, this indicator is known as an "all-in-one" indicator.

In this guide, we will introduce you to the Ichimoku cloud trading strategy. We will explain what the Ichimoku cloud is and show you how to incorporate it into your trading strategies (such as Ichimoku cloud day trading).

What is Ichimoku Cloud?

Ichimoku Kinko Hyo, or simply Ichimoku, is a universal technical indicator developed in the 1940s by Japanese journalist Goichi Hosoda. However, traders around the world use the term “Ichimoku Cloud” more often due to the looks of the indicator.

Ichimoku Kinko Hyo is Japanese for ‘balance at a glance’, which accurately describes the essence of the strategy: a single look at the chart is enough for the trader to see a clearer picture and make a confident next step.

Ichimoku relates to impulse indicators; it determines how intense the price movement is. It has gained the status of a classic indicator and has become well-known and actively used by traders around the world (especially those using the Ichimoku cloud strategy). This is what an Ichimoku Cloud looks like on a chart:

It is clear why this indicator is called the “Ichimoku Cloud.” We can see three lines resembling moving averages (MA) and the cloud itself on the chart.

The Purpose of the Ichimoku Indicator

The Ichimoku cloud is a multifunctional indicator that is used for trading the Ichimoku cloud strategy. The indicator applies to a range of cases. It is not surprising that its creator was Japanese. Its history dates back to the 1860s when the Japanese rice traders on the stock exchange invented candlesticks to display prices on charts.

The Ichimoku Kinko Hyo displays three indicators on the price charts:

Price momentum (intensity of price fluctuations)

• Support and resistance zones
• Trend direction.

The Ichimoku cloud consists of 4 components:

• Tenkan-Sen – blue line
• Kijun-Sen – red line of local maximums and minimums (High/Low)
• Chikou Span – brown (or green) line
• Kumo – cloud.

If you want to use the Ichimoku cloud strategy, then you need to understand what each of these components stand for. This is what the next section explores.

Tenkan-Sen

This is the first line of the Ichimoku indicator, marked blue on the chart. Tenkan-Sen is also called the conversion line. This line represents the average value of the price maximum (High) and minimum (Low) readings over the past N candles. As a rule, the default setting is set at a 9-day period.

The 9-day Tenkan-Sen is almost similar to the 9-day Simple Moving Average (SMA), but it is less smooth. The peculiarity of Tenkan-Sen is that the line indicates whether there is a distinct trend: when the price is following a “flat” pattern, the indicator is flat as well.

However, when the Tenkan-Sen line is moving, it represents the price movement over the 9-day period, which distinguishes Ichimoku from the SMA indicator. The advantage of the Tenkan-Sen line is that it indicates the support/resistance levels and the trend direction at the same time. This factor increases the versatility of this indicator.

Kijun-Sen

Kijun-Sen (marked red) is called the baseline. Similar to Tenkan-Sen, the baseline is calculated from the average value of lows and highs over the last period, the difference between them is that the period of Kijun-Sen is longer – 26 days.

Chikou Span

This is a line that displays the price with a specified lag. By default, the period is set to 52 days. Chikou Span indicates whether there is a distinct trend in the market. The Ichimoku cloud signals the direction of the trend when the Chikou Span moves in either direction.

Kumo

This cloud itself is the culmination of Ichimoku Kinko Hyo and the very “grail” that will make you a true samurai in crypto trading. Kumo determines the equilibrium between support and resistance while taking into account price dynamics during previous periods.

The longer the period of using it, the more accurate the buy and sell signals for your Ichimoku cloud strategy will be. The cloud is divided into large green and red zones, which indicate either an uptrend or a downtrend, respectively.

Kumo belongs to the so-called “leading indicators“. If you look at the chart, you will notice that the Ichimoku Cloud is far beyond the last candle.

Surprisingly, the most important thing is neither the color of the cloud nor the direction of the price, but the area where the movement is taking place. Traders will avoid assets when their price oscillates within a cloud.

Notice that when the price action was in the cloud, there was no clear trend on the Bitcoin chart. But as soon as the price moved outside the Kumo, a strong trend emerged – this is what makes the Ichimoku cloud strategy one of the best trading strategies.

Ichimoku Cloud Trading Strategies

One of the first popular trading strategies among traders is to act on the conversion line (Tenkan-Sen) crossing the baseline (Kijun-Sen), similar to the moving average (MA) cross.

How the Ichimoku Cloud Strategy Works

Each of the components of the indicator plays a key role in Ichimoku cloud trading.

When the Tenkan-Sen (blue line) crosses the Kijun-Sen (red line) upwards, traders open a long position (Long). If, on the contrary, the blue line goes below the red line, we can expect a reversal and a price drop, which implies a sell signal. Examples are illustrated below:

Though the strategies using several components are more fundamental, practice calls to test different options to see what works best.

It is enough for a trader to look at the Ichimoku indicator to understand the potential price movement. That’s why the indicator is considered to be universal. The most reliable buy signals appear when the lagging Chikou Span line breaks above the Kumo cloud.

The reversal pattern indicates that a bearish sentiment prevails in the market. Let’s have a look at the chart:

The green line breaking through the blue one in a downward direction is a signal to stop trading. This is the moment when you need to consider several strategies and trade signals.

Traders take price movements above or below a cloud similarly. Such movements can indicate either an uptrend or a downtrend.

We will shed more light on how you can execute Ichimoku cloud trading later in this article.

How to Trade with the Ichimoku Cloud Indicator

Here's how the Ichimoku Cloud's various components can be used in trading the Ichimoku cloud strategy:

The Cloud

A cryptocurrency is in an uptrend when the price is trading above the cloud and the cloud is in green territory. On the other hand, a cryptocurrency is in a downtrend when the price is trading below the cloud and the cloud is in red territory.

People who follow trends and use this indicator will usually think about long trades when it shows an uptrend, and short trades when it shows a downtrend.

The cloud also represents the degree of volatility. A thicker cloud will result from large price movements, while a thinner cloud will result from a period of consolidation.

Chikou Span

Another component used for trading the Ichimoku cloud strategy is chikou span.

The Chikou Span is used by some traders as an additional confirmation of the trend. The line crossing the price in the bottom-up direction can be seen as a buy signal, while the line crossing the price from the top-down may be seen as a sell signal).

Senkou Span

Traders look to the top line for support if the price is above the Senkou Span, then they look to the bottom line for support.

If the price is below the Senkou Span, traders look to the bottom line for the first level of resistance and the top line for the second.

Tenkan/ Kijun Crossover

The tenkan/ kijun crossover is an important occurrence in Ichimoku cloud trading.

When a crossover occurs, some traders use the Tenkan/ Kijun cross for additional confirmation or even trade signals.

Ichimoku Cloud Day Trading

Day trading is one of the trading strategies that the Ichimoku cloud strategy is suitable for.

Trading cryptocurrencies involves buying a cryptocurrency and selling it for a gain. You can divide your trading into long-term and short-term strategies depending on your goals and how long you want to keep your cryptocurrency.

Day trading entails holding your cryptocurrency for brief periods ranging from a few minutes to a few hours. The goal is to sell your cryptocurrency before the end of the day and achieve positive results in a small but quick way.

The Ichimoku cloud day trading is an excellent Ichimoku cloud strategy for day trading cryptocurrencies. The edge-to-edge cloud setup is the most effective Ichimoku cloud day trading strategy. According to the strategy, when a candlestick closes in the Ichimoku cloud, the price moves to the other side of the Kumo.

When a candlestick forms below the Kumo cloud and then closes above the leading span A, an Ichimoku buy signal occurs. A sell signal appears when a candlestick forms above the Kumo cloud and then breaks and closes below the leading span A.

If you are using the Ichimoku cloud day trading strategy for day trading cryptocurrencies, you will have enough edge-to-edge trade signals to assist you in meeting your objectives. However, you can filter out false signals by using the other elements offered by the indicator.

How to Swing Trade Using Ichimoku Cloud

Swing trading with the Ichimoku Cloud works extremely well when the Kumo twist trade signal is used. Note that the Kumo cloud is the leading element of the Ichimoku indicator (projected 26 periods into the future).

The Kumo twist occurs when leading span A and leading span B cross. A bullish reversal occurs when Leading Span A crosses above Leading Span B while a bearish reversal occurs when Leading Span A crosses below Leading Span B.

The Buy Rules for Ichimoku Cloud Strategy

The Ichimoku cloud system helps traders stay on the right side of the market. The trading rules in this section will assist you in staying with the trend for as long as possible. The Ichimoku system is best suited to swing trading because it maximizes success opportunities while minimizing risks.

The best Ichimoku Kinko Hyo time frame is the one that works best for you. We don't have a preferred timeline.

The steps below will show you how to ride the trend from the start. You will also discover how to maximize your success opportunities.

Step 1: Let the price break through and close above the Ichimoku cloud

To place a buy trade using the Ichimoku cloud, then the price must trade above the cloud. This signifies the start of a new uptrend.

The cloud is designed to highlight levels of support and resistance. Because support and resistance do not exist as a single line, they have several layers deep.

As a result, when we break above or below the Ichimoku Cloud, there is a significant shift in market sentiment.

Step 2: Wait for the conversion to cross above the base line

The price breakout above the cloud must be followed by the conversion line crossing above the base line. Once these two conditions are met, we can consider making a trade.

Step 3: Buy after the crossover at the next candle's opening

Any long trades using the Ichimoku strategy should ideally be entered when the price is trading above the cloud. As a result, following the crossover, we buy at the opening of the next candle.

Step 4: Place a protective stop-loss order beneath the breakout candle

Our protective stop loss should be placed below the breakout candle's low. This helps to accomplish two major goals.

It reduces the risk of large financial losses and also allows us to trade in line with the market's order flow.

Since this is a swing trading strategy, we want to succeed as much as possible from this new trend. We'll look to trail our stop-loss level below the cloud or exit the position once a new crossover in the opposite direction occurs.

Step 5: Take profit when the conversion line falls below the base line

To take profit, we will wait for the conversion line to cross below the baseline. Alternatively, you can wait until the price falls below the cloud, but you risk losing some of your success opportunities.

Pros and Cons of Ichimoku Cloud Strategy

Pros

Versatility

The indicator can be used to detect trends and determine their direction, support and resistance levels, and the intensity of price dynamics.

Simplicity

Ichimoku Cloud can be easily automated with 3commas.io bots. The indicator is very easy to use, whether you are a beginner or a professional trader.

Compatibility

The Ichimoku Cloud indicator is combined with other simple indicators such as MA, MACD, RSI, and others. A comprehensive approach will eliminate unnecessary noise in trading and increase the accuracy of trading signals.

Cons

Variety

For beginners, it may be easy to get confused at first in terms of reading the signals and what the components stand for. This can lead to trading mistakes.

Congestion

Too many lines can be confusing to inexperienced traders. However, this is an easy fix. If you are just getting acquainted with the indicator, you can try different strategies using the lines or the cloud exclusively. This way, you will gradually learn the principles of the indicator and test the strategies.

Improve Your Crypto Trading Strategies With 3Commas Ichimoku Robot

The Ichimoku robot is one of the numerous trading robots that 3Commas offers. There are several potential benefits of including the Ichimoku robot in your trading strategy. These include:

Complete market View

The Ichimoku robot makes more informed trading decisions by providing an overview of the long-term and short-term trends of the market.

Trend Identification

The Ichimoku robot also identifies the current trend in the market, which can help it take trades in the direction of the trend.

Support and Resistance Levels

The robot identifies potential support and resistance levels and that is why it is effective in entering and exiting trades at key levels.

Trend Reversals

The Ichimoku robot can identify potential trend reversals. Hence, traders can use it to trade against the trend.

Automation

3Commas Ichimoku robot can help traders automate their trading strategies and take emotions out of the decision-making process.

Final Thoughts: Ichimoku Cloud Strategy Explained

In 2023, the Ichimoku chart indicator might seem daunting initially, but as traders delve deeper, they often recognize its value.

For those focusing on short-term movements in cryptocurrency markets, the Ichimoku cloud methodology stands out as a commendable approach. It's one of the select advanced tools that's both intuitive and straightforward to implement in your crypto trading activities.

While it's possible to rely solely on the Ichimoku indicator, doing so may elevate the inherent uncertainties of your trades. Given the volatile nature of cryptocurrency trading, it's advisable to complement the Ichimoku cloud with additional indicators to bolster confidence in trading signals. For added convenience, consider automating your Ichimoku cloud approach with tools like the 3Commas Ichimoku automation system.