Ichimoku cloud: what each line means and how it’s worked out

What the Ichimoku cloud is, and what its name means

The full name is Ichimoku Kinko Hyo. In Japanese that means roughly “one-glance balance chart”. The idea was to show, in one picture, where price sits against its recent ranges, and against the ranges before those.

Most indicators average closing prices. Ichimoku doesn’t. Every line except one is the middle of a range: the highest high plus the lowest low, divided by two. The lines move only when a new high or low enters the range, or an old one drops out.

It has five lines. The part people notice first is the cloud: a band between two lines that are drawn ahead of price. Many charts shade it green when the first of those lines is on top and red when the second is.

How each Ichimoku line is worked out, step by step

Here’s the conversion line worked out on one candle. Over the last 9 candles, the highest high is 114.75 and the lowest low is 109.00. Add them and divide by 2: 111.88. The base line on the same candle uses 26 candles: (114.75 + 101.25) ÷ 2 = 108.00.

Charting tools count the shift a little differently. Some move the spans 26 candles on from the candle they’re worked out on, and some count that candle as the first of the 26. So one chart’s cloud can sit one candle along from another’s.

Why 9, 26 and 52

Charting tools usually show it with lengths of 9, 26 and 52 candles and a shift of 26, because those are the numbers in the original work. They’re often explained by the Japanese trading week of the time, which had six days: 9 is a week and a half, 26 is a month of trading days, and 52 is two months.

Markets now trade five days a week, and futures trade nearly around the clock, so some traders change the lengths. Others keep them as they are. There’s no single rule, and whichever lengths you use are your choice. Longer lengths make lines that move less often.

How traders read the Ichimoku cloud

Price and the cloud. When price is above the whole cloud, it’s above both leading spans: the middles of ranges worked out 26 candles earlier. Below the cloud, it’s under both. Inside the cloud, it’s between them. Many traders use that as a quick read of the trend, not as a signal on its own.

The conversion and base lines crossing. The conversion line covers 9 candles and the base line 26, so the conversion line reacts first. When it crosses above the base line, traders call it a bullish cross, or a TK cross, from tenkan and kijun. Below is a bearish cross. Some only count a cross when price is also clear of the cloud on the same side.

Back to the base line. Price comes back to the base line, or within a distance you set, and closes back away from it. Some traders watch for this while price is clear of the cloud. In the second picture, the next candle closes below the line instead.

The lagging span. Some traders check whether the lagging span is clear of the candles it’s drawn against, as another read on the same question: is price above or below where it was?

What counts as a close above the cloud, and what doesn’t

Both spans. The cloud is everything between the two leading spans, whichever is on top. A close above one of them can still be inside the cloud.

The close decides it. A wick that pokes through and comes back is a touch, not a close above. Some traders also ask for the candle’s whole body to be past the cloud.

A thin cloud. When the two spans are close together, the cloud is thin and price crosses it easily. Some traders only count a break of a cloud at least a set number of ticks thick. That number is yours to choose.

It needs enough history. With 52 and 26, the cloud needs 78 candles before its first value. On a chart with less history, it simply isn’t there.

Where the Ichimoku cloud comes from

It was developed by Goichi Hosoda, a Japanese newspaper writer who used the pen name Ichimoku Sanjin. He worked on it for years before the Second World War, with a team of helpers doing the sums by hand, and published it in 1969. It became known outside Japan from the 1990s and is now built into most charting platforms.

Often confused with

Moving averages. They average closes. Ichimoku’s lines are the middles of high to low ranges, so they go flat when no new high or low comes in. Read about moving averages.

Donchian channels. The highest high and lowest low of a number of candles, drawn as a band. The conversion and base lines are the middles of two such bands. Read about Donchian channels.

Moving average crossovers. A faster average crossing a slower one. The TK cross is Ichimoku’s version, using range middles instead. Read about moving average crossovers.

Supertrend. Another indicator drawn as one line above or below price. Read about Supertrend.

Marking Ichimoku setups on your chart

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Common questions

Related

• Moving averages (SMA and EMA)
• Glossary

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