Ichimoku Cloud Explained | Part 1 – Why Use Ichimoku? |
Ichimoku analysis is the study of market cycles, the natural growth and the recession of supply and demand, in a liquid market over time. Ichimoku gives traders a picture of the condition of a market at present and an objective view of where support and resistance may exist in the future. In my judgment, this understanding is crucial to success in any real-world trading environment.
In this series of articles, I will take you on a step-by-step walkthrough of the Ichimoku Cloud indicator. We will take small bites out of what is a vast subject matter. By the end of this in-depth study, my goal is for you to have a working knowledge of how to apply Ichimoku so that you can create a trading plan and practice your analysis on a demo account.
Possessing this level of skill will be invaluable to you when you watch the live trading videos that I will begin posting soon on this site.
So let’s get started!
What is so special about Ichimoku? What does it do that other indicators don’t do?
You may be a short term trader, swing trader, or long-term position trader. Regardless of how long you hold positions, one of the unique and robust characteristics of the Ichimoku system is that you can apply it to any (and every) trading period you prefer. In any liquid market, buyers and sellers cause the price of the traded instrument to rise and to fall when masses of orders are placed and filled. Traders often call this rising and falling of the price over time ‘volatility.’ Without price volatility in markets, no opportunity would exist for traders to make money.
Ichimoku Shows You When Supply and Demand Are Balanced
There are moments in the time cycle when supply and demand become naturally balanced. Low price volatility usually characterizes these periods. Goichi Hosoda, the creator of Ichimoku Kinko Hyo, named this balance ‘equilibrium.’ But all experienced traders know that price stability never lasts in healthy markets. Ichimoku Sanjin often said, “Simplicity is the truth.” Ichimoku is one of the few systems ever invented that naturally and accurately measures the balance points of a market in real-time with only two pieces of data – the price and the time. Simplicity is the truth.
The value of Ichimoku as an indicator is that it can instantly show a trader when the natural equilibrium of a market exists, and, the key to making money, when and where the balance could be disrupted.
How Does a Market in Equilibrium Look on an Ichimoku Chart?
- When supply and demand are in balance, the lines of Ichimoku will be interacting with one another and the Cloud.
- The price will be inside the cloud.
- The Senko Span B (Leading Line B) will be flat.
- You will be able to look back at least 52 candles on the chart and see a reasonably clear price range (or box). The range box could extend longer than 52 candles back. A trading range can last indefinitely.
- The price could also be moving above and below the cloud, but not making any headway in one direction or another after each swing.
One note here about range trading: You can do it with Ichimoku. However, remember that Ichimoku shows you when the market is in equilibrium so that you can tell when that balance breaks.
The primary purpose of Ichimoku is to help you trade with an established trend.
There are ways to use the lines of Ichimoku to trade ranges in the same timeframe or on lower timeframes than your trading chart. However, I don’t go into that in this article, and I don’t recommend anyone to attempt range trading with Ichimoku lines until you have mastered trading trends.
How Does a Trending Market Look on an Ichimoku Chart?
When demand rises on one side of the trade, when more traders start to buy, and few traders are willing to sell at the current price, the equilibrium will break. In this example, bids on the buy-side will rise to entice holders to sell. The market begins to move in the direction of the winners – those who bought at lower prices. In other words, the market will start to trend higher.
Ichimoku analysis is about being able to see when a market is either balanced (in equilibrium) or whether the calm is broken (in a trend, up or down) from a level balance.
Trading Question #1
So my first question to you is this:
Do you want to trade trends?
Some people don’t. Some people love ranges and want to buy support, sell resistance, and repeat. And that is fine! Nothing wrong with range trading. But again, the question here and now is, do you want to trade trends?
Whether you want to trade with trends is an essential question for you to think about and to answer for yourself. Trading trends can be the most emotionally tricky kind of trading. However, it can also be the most rewarding.
In my experience, the most challenging aspect of trend trading is that it requires lots of patience. It takes loads of patience because you will spend most of your time waiting for something to happen. No joke. Trend trading can be incredibly dull if you are someone like me who loves the action that short-term trading and scalping can bring. But I trained myself to become a swing trader because I could not make money otherwise.
Ichimoku Cultivates Patience
One of the main skills that I learned over time is that one must learn how to be patient when trading currencies. Patience is a key factor in what separates successful traders from losing traders. I typically hold positions for 3-10 days, and sometimes longer if I’m in profit. The holding time depends on the market. I am just along for the ride.
If you are trading from a daily chart, it can take days (sometimes weeks) for a good trade setup to appear on the market you are analyzing. If you trade lower timeframes, or if you use alternate chart types, like Renko charts (more on those in a future article and video), you may be in and out of trades in less time.
However, when you are analyzing any market to find the dominant trend or market bias, always start with at least the daily chart. Then you can trade on lower time frames, but always in the direction of the daily trend.
I look at higher timeframes like the Monthly, Weekly, and Daily charts to see what Ichimoku is telling me about the long-term market equilibrium so that I can understand what is happening on the lower timeframes. The reason is that, in my own experience, trading based only on an analysis of smaller timeframe charts results in many more losses than wins.
I encourage everyone who trades to make their trading decisions based on what is happening on higher timeframes, mainly if you are a scalper. If you do this, you will have times when the market makes quick, significant moves that on lower timeframe charts look beautiful! You will feel angry that you missed out on those trades. And you did. But learning to ignore that feeling of missing those trades is what I meant when I said earlier that it takes a tremendous amount of patience to trade trends successfully.
As a trend trader, you must learn to wait, to resist the desire to jump into a fast-moving market to chase price. The payoff is that you can take your time with higher timeframe cycles because you are looking at much more data that way, which makes for a clearer understanding of the reality of a market’s condition. You can also make a lot more money by holding winning positions in long-trending markets.
When you take a correct position in a trending market, those fast price movements you once missed will instead be making you money! You will already be along for the ride, not chasing the price anymore. (And you don’t have to sit in front of the charts all day and late into the night.)
Trading Question #2
If you answered ‘yes’ to Question #1, then my next question is:
What can you do with trends as a trader?
We’ll answer that in Part 2, and we’ll talk about why using Ichimoku analysis gives you a significant edge if used correctly.
Be sure to bookmark this page, and please post a comment below. Let me know if you liked this article, give me your opinion or experience with Ichimoku, or ask any questions you may have.
Look for Part 2 coming soon!