Ichimoku Cloud thinkorswim | How to Analyze the Trend
The Ichimoku clouds are a dynamic trend-following indicator that provides support and resistance, entry and exit points, and identifies trends.
The Ichimoku clouds are also known as Ichimoku Kinko Hyo, which translates to “one look equilibrium chart.”
The Ichimoku Clouds are an all-in-one indicator but can also be supplemented with others like the RSI and MACD.
Key Takeaways
The Ichimoku Cloud is a technical analysis tool that is used to identify trends, support and resistance levels, and potential entry and exit points in financial markets.
The Ichimoku Cloud is made up of several different components, including the Kumo (cloud), Tenkan-Sen (conversion line), Kijun-Sen (base line), and Chikou Span (lagging line), which are used to generate trading signals and identify potential trends in the market.
If you want to learn more about swing or day trading with the Ichimoku clouds, you can join the HaiKhuu Trading Community to get hands-on help from our expert traders.
What are the Ichimoku Clouds?
The Ichimoku Cloud is an effective dynamic trend following technical indicator that was developed for 30 years before being introduced to the public in 1969. Its Japanese name is the Ichimoku Kinko Hyo, which roughly translates to English as the “at-a-glance equilibrium chart, " but we call it the Ichimoku Cloud in the West.
The man behind the indicator is a Japanese Journalist named Goichi Hosoda, who tracked the rice futures market. He came up with the Ichimoku Cloud indicator to help him identify support and resistance in the rice futures market.
If it’s your first time looking at the Ichimoku Cloud indicator, it may look like a big mess of lines that make up an incomprehensible mess of different lines on your chart, but it’s not as confusing as it may seem. It’s a simple yet intricate and effective tool for analyzing and identifying the trend of a stock.
The indicator set is made up of 5 different lines on the chart, we’ve got the Tenkan-Sen/Conversion Line(Blue), the Kijun-Sen/Base Line(Purple), the Senkou Span A Line/ Span A Line(White), the Senkou Span B Line/ Span B Line(Yellow), and lastly the Chikou Span/Lagging Line(Red).
Tenkan-Sen/Conversion Line
We’ll first review the Tenkan-Sen/Conversion Line and the Kijun-Sen/Base Line. The Tenkan-Sen/Conversion Line is a moving average line created by adding the highest and lowest prices of a stock over a nine-candle period and then dividing the sum by two.
This line is not to be confused with a simple moving average. A simple moving average adds up the closing prices of the last nine periods and divides the ending sum by nine. The Tenkan-Sen/Conversion Line is used to gauge the chart's immediate/short-term support and resistance because of its formulation with only nine periods of data points.
If the price of a stock is above the Tenkan-Sen/Conversion line, then the Tenkan-Sen/Conversion Line will act as support, and vice versa if the price of a stock is below the line.
The green arrow indicates the conversion line (teal line).
Kijun-Sen/Base Line
The Kijun-Sen/Base Line is a moving average created by adding the highest and lowest prices of a stock over a 26-candle period and then dividing by two. This line helps you identify the stock's midpoint and gauge short to mid-term support and resistance.
If the share price is above the Kijun-Sen/Base Line, this indicates that the stock price is above the midpoint. Furthermore, if the stock is above the Kijun-Sen/Base Line and the Kijun-Sen/Base Line is angled upwards, this further indicates that the short-term momentum of the stock is bullish.
The Kijun-Sen/Base Line is considered to be one of the most important lines in the Ichimoku Cloud indicator. Its longer time frame data makes it more reliable for finding more significant support and resistance levels on the chart.
The Tenkan-Sen/Conversion Line and Kijun-Sen/Base Line work together to help create buy and sell signals.
When the Tenkan-Sen/Conversion Line crosses above the Kijun-Sen/Base Line, traders typically identify this as a buy signal. Conversely, when the Tenkan-Sen/Conversion Line crosses below the Kijun-Sen/Base Line, traders typically identify this as a sell signal.
This crossover is referred to as a TK Cross. We’ll delve more into this later.
The green arrow indicates the baseline (purple line).
Senkou Span A/Span A Line
Next up, we have the Senkou Span A/Span A Line and the Senkou Span B/Span B Line of the Ichimoku. These two lines make up the Kumo/Cloud on the chart. The Cloud is the area on the indicator with the green and red color fill.
The Span A Line is the top line of the cloud, and the Span B Line is the bottom line of the cloud when the cloud is green. When the cloud is red, the Span B line is at the top, and the Span A line is at the bottom because they have crossed over each other.
The Senkou Span A/Span A Line is a moving average created by combining the Tenkan-Sen/Conversion Line and the Kijun-Sen/Base Line, then dividing by two and plotting the line 26 periods to the future on the chart.
Senkou Span B/Span B Line
The Senkou Span B/Span B Line is a moving average created by adding the highest and lowest prices over the last 52 candle periods, then dividing by two, and then plotting the line 26 periods into the future on the chart.
The Senkou Span A/Span A Line and Senkou Span B/Span B Line determine support and resistance on the chart. If the Span A line is above the Span B line, this indicates the overall trend of the stock is bullish, and if the Span B line is above the Span A line, this indicates the overall trend of the stock is bearish.
The thickness of the cloud is an essential indicator of how likely the price is to break either above or below the cloud. The thicker the cloud, the hard it’ll be for the price to break through the cloud completely. The thinner the cloud is, the easier it is for the price to break through the cloud. In a thick cloud, the stock will have an easier time breaking through one line of the cloud, either from above or below, but it’ll have a harder time completely breaking through the cloud because the support/resistance is spread out throughout the cloud.
Thin clouds tend to have the most significant support/resistance levels focused on the Span A and Span B lines itself. However, if the price manages to break above or below one of the lines in a thin cloud, it’ll also have an easier time breaking through the other line.
A common question about the Span A and Span B lines is if it signifies anything when the Span A line crosses above or below the Span B line. When the Span A and Span B line cross over each other, it doesn’t signify anything in particular.
The Kumo/Cloud portion of the indicator charted 26 candle periods ahead is attempting to predict where it believes the stock trend will go and where the support and resistance levels will be in the future.
The distance between the share price and the cloud doesn’t signify anything, either. This shows you how large of a range there is before the stock hits cloud support/resistance.
Chikou Span/Lagging Line
The last line of the indicator is the Chikou Span/Lagging Line. This line is created by taking the closing price of the stock today and charting it back 26 candle periods. This may sound relatively useless, but its main purpose is to help you gauge the direction and intensity of the trend by looking at where the price is now compared to where it was 26 candle periods back.
If the Chikou Span/Lagging Line was above the stock price 26 days ago, this signifies that the stock is likely to be in a bullish trend.
If the Chikou Span/Lagging Line was below the stock price 26 days ago, this signifies that the stock is likely to be in a bearish trend.
If the Chikou Span/Lagging Line is above the Cloud, this indicates the overall trend is likely to be bullish, and if the Chikou Span/Lagging Line is below the cloud, this indicates the overall trend is likely to be bearish.
How to Use the Ichimoku Cloud - TK Crossovers and Chart Analysis
Now that we’ve gone over all 5 lines of the Ichimoku Cloud indicator, we’ll go over how it’s utilized to help you identify the trend of a stock and when to buy and sell
The main signal used for determining when to buy and sell a stock is when a TK crossover occurs.
A TK crossover is a signal that occurs when the Tenkan-Sen/Conversion Line crosses above or below the Kijun-Sen/Base Line.
If the Tenkan-Sen/Conversion Line crosses above the Kijun-Sen/Base Line, this is seen as a TK crossover to the upside. This is generally a buy signal assuming a fake-out doesn’t occur.
When the Tenkan-Sen/Conversion Line crosses below the Kijun-Sen/Base Line, this is seen as a TK cross to the downside. This is generally a sell signal assuming a fake-out doesn’t occur.
When a TK crossover to the upside happens, you want the share price to already be above the Tenkan-Sen/Conversion line and the Kijun-Sen/Base Line to be angled up about 30 degrees to 45 degrees steep for the most optimal buy signal.
For TK crossovers to the downside, you want the share price to be already below the Tenkan-Sen/Conversion Line and the Kijun-Sen/Base Line to be angled down about 30 degrees to 45 degrees for the most optimal sell signal.
The Ichimoku Cloud indicators work best in trending markets, so in the case of TK crossovers, you’d want the Kijun-Sen/Base Line to be angled as much as possible for good signals instead of being flat or moving up or down at a low angle. For example, if the Kijun-Sen/Base Line and the Tenkan-Sen/Conversion Line are flat, this indicates that the stock is not trending up or down significantly. Typically, this is seen on stagnating stocks or when the stock has entered a consolidation phase.
If a TK crossover to the upside happens but the share price is below the Tenkan-Sen/Conversion Line as it happens, the signal will most likely not play out and be considered a fake out.
Likewise, if a TK crossover to the downside happens but the share price is above the Tenkan-Sen/Conversion Line as it happens the signal will most likely not play out and also be considered a fake out.
The traditional guidelines of when you should take a TK crossover buy or sell signal is based on where the TK crossover happens on the chart.
If the TK crossover to the upside happens above the cloud, it’s considered a strong buy signal. If the TK crossover to the upside occurs below the cloud, it’s regarded as a weak buy signal. If the TK crossover to the upside happens inside the cloud, it’s a neutral buy signal.
If the TK crossover to the downside happens below the cloud it’s considered a strong sell signal. If the TK crossover to the downside happens above the cloud, then it’s regarded as a weak sell signal. If the TK crossover to the downside happens inside the cloud, it’s considered a neutral sell signal.
The blue arrow indicates a TK crossdown (teal line crossing below purple line).
When basing your trade entries and exits off of the TK crossover signals, you want to watch the Tenkan-Sen/Conversion Line as short-term support for the stock’s move upwards or downwards. The Kijun-Sen/Base Line will be your secondary line of support if the stock price breaks below the Tenkan-Sen/Conversion Line(Note for this to be a significant break of support, the candle has to close below the support line).
You can consider using the Tenkan-Sen/Conversion Line as a stop loss and profit-taking point if the stock breaks below the Tenkan-Sen/Conversion Line. You can also consider using the Kijun-Sen/Base Line as the stop loss line if you believe the stock will retrace back above the Tenkan-Sen/Conversion Line.
When the share price is between the Tenkan-Sen/Conversion Line and the Kijun-Sen/Base Line, you’ll often see the stock jump between the two lines as they are being used as support/resistance for the price. When the share price is between these two lines, the stock is in a consolidation phase in most cases. The same occurs when the share price bounces between the Span A and Span B lines of the cloud.
While you use the Tenkan-Sen/Conversion Line and the Kijun-Sen/Base Line for TK crossover signals You should be using the Chikou Span/Lagging Line as a gauge of how much momentum or strength the trend has. Optimally you want the Chikou Span/Lagging Line to be above the share price when the TK crossovers happens to the upside and the Chikou Span/Lagging Line to be below the share price when the TK crossover occurs to the downside.
If the share price is too far above or below the cloud the more significant lines of support and resistance you should look at will be both the Tenkan-Sen/Conversion Line and the Kijun-Sen/Base Line.
By looking at the location of the price of the stock in relation to the lines provided by the Ichimoku Cloud indicator, you should be able to determine what the trend of a stock is at a glance of the chart and also determine where the support and resistance levels of the stock are by looking at where the share price is in relation to the Tenkan-Sen/Conversion line, Kijun-Sen/Base Line, Span A, and Span B Lines.
Analyzing the Trend With the Ichimoku Clouds
In the image below, at the bottom left, a TK crossover occurs, which is an entry signal.
A bullish TK crossover is when the conversion line (teal) crosses over the baseline (purple).
It is even better if this happens above a green cloud.
The green arrow indicates a TK crossover (teal line crosses over the purple line).
Ichimoku Cloud Day Trading Tips
The only time you would use the 1 and 5-minute charts with the Ichimoku indicator is when you are day trading. The buy and sell signals are the same across all timeframes, making the Ichimoku indicator valuable for all types of traders.
Generally, you will use the 1-minute chart when you are scalping and the 5-minute chart when you are taking a day trade. Most traders prefer to use both the 1 and 5-minute timeframes to see all the data possible.
Ichimoku Cloud | Strengths and Weaknesses
To best utilize a technical indicator, you need to understand the strengths and weaknesses of the indicator.
The Ichimoku Cloud is effective for usage over various charting time frames. The indicator was initially designed for daily time frame usage, but you can use it for shorter time frames like the 1 and 5-minute charts.
The Ichimoku Cloud indicator is designed to show you confirmations of a trend shift and current trend direction as opposed to predictive indicators that aim to help you get into a move up or down before it happens. So due to the nature of the indicator, it’ll give you more signals to get in or out of a trade based on confirmed trend shifts. Therefore, increasing your success rate instead of throwing a bunch of predictive entry and exit signals with more varied success rates.
The Ichimoku Cloud indicator is best used with trending markets. Stocks with low volume, low volatility, and only moving sideways over long periods are not ideal for charting with the Ichimoku Cloud. On the other hand, stocks that aren’t moving much will give your useless signals for entries and exits.
The Ichimoku Cloud requires historical data to chart its support and resistance lines to give you buy and sell signals. Without historical data, the indicator cannot plot lines on the chart. IPO stocks don’t have historical data to go off of, so they will require a longer period before Ichimoku Cloud lines appear for the stock.
The Ichimoku Cloud is a lagging indicator. Lagging indicators confirm price movements and trend shifts after they have already occurred, as opposed to leading indicators like the CCI(Commodity Channel Index) or the RSI(Relative Strength Index), which tend to try to predict trend shifts before they occur. This can be a strength or a weakness, depending on what type of trading style you prefer.
Since the Ichimoku Cloud indicator is a set of five indicator lines, it’ll make the chart harder to read if you are using another indicator on the chart with it. Too many indicators on the chart could give you information paralysis and your trading efficiency overall.
Ichimoku Cloud Calculation
The Ichimoku Clouds are composed of the conversion line, baseline, Leading Span A, Leading Span B, and the Lagging Span.
The length of a period in the following calculations is determined by the time frame you are using on your Thinkorswim chart.
For example, if you use the daily time frame, one period equals one day.
Conversion Line
(9-period high + 9-period low) / 2
Base Line
(26-period high + 26-period low) / 2
Leading Span A
(Conversion Line + Base Line) / 2
Leading Span B
(52-period high + 52-period low) / 2
Lagging Span
The close 26 periods in the past.
Other thinkorswim Indicators
The Ichimoku cloud is one of the many indicators available on thinkorswim. Other popular indicators include the volume profile, VWAP, RSI, and anchored VWAP.
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