Ichimoku Cloud Definition: Day Trading Terminology

Ichimoku Cloud Definition: Day Trading Terminology

The Ichimoku Cloud is among the most versatile technical indicators. It identifies support and resistance levels, gauges momentum, identifies the direction of trends and provides trading signals.

With one single glance, traders can identify the trends in securities and examine further signals within that trend. While this indicator might seem complicated, it is actually a very simple indicator that is highly useful for all traders.

Trading With Ichimoku

The indicator is made up of a conversion line (CL) and a base line (BL). The CL is faster and more sensitive. The BL will trail the CL, but follows any price action well. Their relationship is similar to the one between 9 day and 26 day moving averages.

The cloud itself is the most prominent feature. It is composed of a leading span A (LSA) and a leading Span B (LSB). The LSA is the average of both lines. The LSB is the average of the 52 day low and the 52 day high.

There are two methods of identifying trends using the Ichimoku indicator. First, trends will be up when prices are above the indicator and down when prices are below. Second, an uptrend will be strengthened when the LSA is rising and higher than the LSB. Downtrends will be reinforced when the LSA is dropping and lower than the LSB.

Final Thoughts

The Ichimoku indicator is ideal for quickly and effectively identifying trends in the medium term price range of securities, and provides additional insight into relative strengths of those trends in the short term.

Most day traders use Ichimoku’s indicator to sense trends in prospective trades, and then examine short term indicators to make final decisions on trading specific securities that day.

As with any indicator, it is best used in combination with complementary indicators to identify potential trades and then act on them with all the available relevant information.