In the 1960s, Goichi Hosoda, a journalist from Japan, developed a chart known as the Ichimoku Cloud. The Ichimoku Cloud was able to provide more data compared to the standard candlestick chart. A first glance at the Ichimoku Cloud can scare you, but with a good understanding of it, you will be in a better position to predict future trading patterns.

The Ichimoku Cloud is a chart that’s used to show the support and resistance, trend and momentum of a cryptocurrency in one view. The Ichimoku Cloud can show the three aspects of an asset by pulling together three moving averages and plotting them on a chart. The figures obtained from the moving averages are then used to create a cloud that can be used to forecast support and resistance levels of a given asset.

Functioning of the Ichimoku Cloud

The Ichimoku Cloud is unique in that it can display data from leading indicators and those that are lagging. The chart is made up of five lines, which are used to signify different trading periods and patterns. The five lines include:

  • Conversion Line: shows the 9-day moving average.
  • Base Line: for 26-day moving average
  • Leading Span A
  • Leading Span B
  • Lagging Span

One special aspect of the Ichimoku Cloud is that, unlike other technical analysis methods, moving averages used are not based on closing prices. Instead, the moving averages are obtained from low and high points of a given period. Due to the multiple elements that the Ichimoku Cloud produces, many signals are generated in the end. To simplify the signals produced, they have been classified into two broad categories, momentum signals, and trend-following signals.

Graph study Ichimoku Clouds on trading pair BTC/USDT

Momentum signals

These signals are generated depending on how the market price relates to the baseline and the conversion line. Once the conversion line and the price of a digital currency go above the baseline, a bullish run signal is created. A bearish momentum, on the other hand, is generated when either or both the market price and the conversion line go below the baseline.

Trend-following signals

The relationship between the cloud color and market prices create these types of signals. When the prices of an asset remain above the clouds for a significant amount of time, then there is a high probability that the currency is experiencing an upward trend. On the flip side, when the prices are moving below the clouds, it indicates a downtrend. It is only on a rare occasion that the trend of the crypto asset can be considered neutral and that’s when the prices are moving in a sideways manner in the cloud.

Conclusion

It is important to note that technological advancement has led to the creation of software that has made it possible to conceal some lines from the Ichimoku Cloud chart, leaving only the lines that are of importance to the trader. As a trader, you should focus on the lines that give you more critical information that you need to trade.

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Author: Tokens Team
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