Technical Analysis 101: What is the Ichimoku Cloud?

There are many traders that just won’t subscribe to technical analysis.

But after 20+ years of using it, I can personally tell you it works very well. In fact, I’ve been using a combination of Bollinger Bands (2,20), MACD, relative strength (RSI), MACD and Money Flow with accuracy rates of up to 80%.

What technical analysis allows us to do is pinpoint where fear and greed are getting a bit out of hand. They allow us to measure market psychology, if you will.

However, there’s no such thing as a perfect system. So, I’m always looking for new ways to improve it.  One way is by using the oddly-named Ichimoku Cloud. 

The Ichimoku Cloud

What’s nice about the Ichimoku Cloud is that it displays support and resistance, momentum and trend all in one chart.

Each cloud includes the following:

  • Tenkan-Sen
  • Kijun-Sen
  • Chikou Span
  • Senkou Span A
  • Senkou Span B

Let’s start with the cloud itself, which is made up of Senkou Span A and B. 

According to

The trend is up when prices are above the Cloud, down when prices are below the Cloud and flat when prices are in the Cloud. Second, the uptrend is strengthened when the Leading Span A (green cloud line) is rising and above the Leading Span B (red cloud line). This situation produces a green Cloud. A downtrend is reinforced when the Leading Span A (green cloud line) is falling and below the Leading Span B (red cloud line).

Then, when the TenkanSen (blue line) and KijunSen (red line) are above the cloud, the trend is positive.  If the two are below the cloud, the trend is then considered negative.

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We can see this play out in (AMZN) for example.

In addition, a buy signal is reinforced when Tenkan-Sen crosses above the Kijun-Sen while the two are above the cloud. A sell signal is then reinforced when the Tenkan-Sen crosses below the Kijun-Sen while the two are below the cloud.

The Chikou Span (green line) is a lagging indicator based on 26-periods. When the Chikou span is above the asset price, the market is said to be bearish, and when the Chikou span is below price, the market is said to be bullish.

With Chikou Span for example, look at again.

Notice what happens when the green line moves decidedly above the price of the stock.  It helps us identify a bullish situation.

Of course, we can always confirm our findings with Bollinger Bands (2,20), relative strength (RSI), MACD, Money Flow (MFI) and Williams’ %R (W%R).

Granted, technical analysis isn’t always the easiest to learn.  But once you begin to understand how to use it to spot opportunities, the more money you stand to potential earn.

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