The Ichimoku Cloud is a collection of TA indicators that help traders determine market momentum, trend direction, and S/R levels. It uses a combination of moving averages to compute a cloud that can help predict potential price fluctuations.
The Ichimoku Cloud consists of 5 lines:
1. The Tenkan-sen, or Conversion Line, is the fastest line in the Ichimoku Cloud. Calculated as the average of the highest high and the lowest low over the past 9 periods, it offers insights into short-term price momentum.
2. The Kijun-sen, or Base Line, represents the mid-term trend. It is calculated similarly to the Tenkan-sen but over 26 periods. A crossover between the Tenkan-sen and the Kijun-sen can signal potential shifts in market sentiment.
3. Senkou Span A, or Leading Span A, is the midpoint between the Tenkan-sen and the Kijun-sen, plotted 26 periods ahead.
4. Senkou Span B, or Leading Span B, represents the average of the highest high and the lowest low over the past 52 periods, also plotted 26 periods into the future. The area between Senkou Span A and Senkou Span B forms the cloud, providing insights into potential future S/R levels.
5. The Chikou Span, or Lagging Span, is the closing price plotted 26 periods in the past. It can help traders gauge the current momentum and assess potential trend reversals.
The key part of the Ichimoku Cloud indicator is the cloud. It is formed as the area between Senkou Span A and Senkou Span B. When Senkou Span A is above Senkou Span B, the cloud indicates an uptrend and is colored in green. When Senkou Span A is below Senkou Span B, the cloud signals a downtrend and is colored in red (see image below).
Learn more: Ichimoku Clouds Explained.