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Ichimoku Cloud: how to use in Cryptocurrency Trading?
The best trading strategies require analysis and the use of technical indicators, which help you to see the most interesting market movements. Now we will show you what the Ichimoku Cloud is and how to read it.
What is the Ichimoku Cloud?
The Ichimoku Cloud indicator, developed by Japanese journalist Goichi Hosoda in the 1930s, was perfected for nearly thirty years before being introduced to the public in the 1960s. Also known as Ichimoku Kinko Hyo, this indicator translates as "a balancing chart at a glance " and is noted for its ability to combine multiple technical analysis strategies on a single chart.
Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and direction of a trend. To do this, it takes multiple averages and plots them on the chart. It also uses these figures to calculate a "cloud" that attempts to forecast where price may encounter support or resistance in the future.
The Ichimoku cloud provides more reference points than the traditional standard candlestick chart. While it looks complicated at first glance, those familiar with how to read charts often find it easy to understand with well-defined trading signals.
While the Ichimoku cloud uses averages, they are different from a typical moving average. Simple moving averages (MAs) take the closing prices, add them up and divide that total by how many closing prices there are. In a 10-period moving average, you add up the closing prices for the last 10 periods and then divide by 10 to get the average. But the Ichimoku cloud is calculated differently. They are based on highs and lows over a period and then divided by two. Therefore, Ichimoku averages will be different from traditional moving averages, even if the same number of periods are used.
This indicator helps traders identify high-quality trading opportunities in trending markets by establishing price momentum and plotting support and resistance zones.
Although versatile, the Ichimoku Cloud is primarily a momentum-based trend following tool, similar to other technical indicators such as the Parabolic SAR, Bollinger Bands and Moving Averages. Its popularity has been sustained over the years due to its effectiveness in providing a comprehensive view of market behavior.
What does this trading strategy tell you?
There are two ways to identify the general trend using the Ichimoku cloud.
First, the general trend is up when the price is above the cloud, down when the price is below the cloud and non-trending or in transition when the price is in the cloud.
Second, the uptrend strengthens when the Blue Cloud line rises and is above the Red Cloud line**. This situation produces a green cloud. Conversely, a downtrend is strengthened when the Green Cloud line is falling and below the Red Cloud line. This situation produces a Red Cloud. Because the cloud moves forward 26 days, it also gives an idea of future support or resistance.
Traders often use the cloud as an area of support and resistance based on the relative location of the price. The cloud provides support/resistance levels that can be projected into the future. This distinguishes the Ichimoku cloud from many other technical indicators that only provide support and resistance levels for the current date and time.
The crosses are another way in which the indicator can be used. Watch for the conversion line to move above the base line, especially when price is above the cloud. This can be a powerful buy signal. One option is to hold the trade until the conversion line falls back below the baseline. Any of the other lines could also be used as exit points.