By Vibhu Singh and Ashish Garg
The Ichimoku cloud indicator is a technical indicator of Japanese origin and was a proprietary indicator with its Japanese formulator for around 30 years.
It involves calculating five lines of short to medium duration on the high, low and close of a security’s prices and plotting an area, between two of these five lines, better known as Ichimoku cloud.
These lines help in determining the direction, momentum and support-resistance levels for the time series data. The Ichimoku cloud indicator also generates buy and sell trading signals and is usually plotted along with candlestick to enable better decision making and clearer plots.
Calculations for the lines are simple and the time period chosen is somewhat arbitrary:
- Tenkan Sen or Conversion Line: (20-period-high + 20-period-low)/2
- Kijun Sen or Base Line: (60-period-high + 60-period-low)/2
- Senkou Sen A or Leading Span A: (Base Line + Conversion Line)/2
- Senkou Sen B or Leading Span B: (120-period-high + 120-period-low)/2
- Chikou Span or Lagging Span: (Close of 30 periods ago)
The Direction Of The Price Action
The Ichimoku cloud is formed between the Leading Span A and Leading Span B and helps in determining the strength and direction of the price action trading.
For example, the direction or trend of the price action is up when the prices are above the Ichimoku cloud. Similarly, the direction of the price action is down when prices are below the Ichimoku cloud and the direction is flat when the prices are somewhere in the Ichimoku cloud.
The Strength Of The Price Action
The Strength can be estimated using the difference between the Leading Span A and B lines. When the Leading Span A is increasing and above the other span line, the increase in the difference signifies strength in the uptrend.
It also means that the Ichimoku cloud is getting thicker. Similarly, the growth of the Leading span B over the other span line signifies strength in the downtrend and the thickness of the Ichimoku cloud increases again though in the opposite direction.
Python Code And Trading Strategy
The Python code below loads the OHLC data for a cryptocurrency named Bitcoin. It then calculates, plots the various components and the Ichimoku cloud using the pandas and matplotlib functionality.
Conclusion
Ichimoku cloud is also known as Ichimoku Kinko Hyo. Ichimoku cloud is a technical indicator to gauge momentum, trend and strength of the price action using five lines and a cloud. The indicator has crossover points, just like MACD, to determine buy and sell signals.
Other classic momentum trading indicators can also be used in conjunction with the Ichimoku cloud to produce clearer buy and sell signals.
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File in the download: Ichimoku Cloud And Trading Strategy Python code
Disclaimer: All investments and trading in the stock market involve risk. Any decisions to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.
