Does anyone use Ichimoku clouds? If not, here's a very quick run through.
High Level: The cloud works best in trends. Price above the cloud = bullish trend up. Price below the cloud = bearish trend down. Price in the cloud = no trade.
Basic settings: Here's a screenshot from investopedia.
When you go to input the settings on your platform, the default will be..
Conversion Line - 9 (The average of the highest high and the lowest low calculated over the previous nine periods)
Base Line Length - 26 (This is the average of the highest high and the lowest low over the past 26 periods)
Leading Span A Length - 26 (The average of the previous two plotted 26 periods ahead)
Leading Span B Length - 52 (averages the highest high and the lowest low taken over the past 52 candles and plotted 26 periods ahead)
Lagging Span - 26 (Close price of each candle plotted 26 periods behind)
In Japan, traditionally the work month included 26 days which is why that number is used. Personally, I like fib numbers. So my settings are in order... 8,21,21,42,21. This also lines up with the 8/21 crossover which I've come to learn is so key. The traditional settings are how 99% of traders will use this though and probably recommended until you get a feel.
What it looks like: Here's the last year of IWM daily candles.
Green cloud = bullish cloud trend, top acting as support and bottom as final support.
Red cloud = bearish cloud trend, bottom acting as resistance and top as final resistance.
Blue line = 8 EMA
Orange line = 21 EMA
Yellow line = Lagging Span
First lower indicator - RSI
Second lower Indicator - MACD
How to use this: First of all, while it can be as simple as break above the cloud = go long and break below = go short, often times, those events have already missed big chunks of the move or lost significant profits. Those moves are the LAST indicator for a new trend taking hold.
This chart alone has MANY support and resistance levels depending on where you are. When firmly above or below the cloud, it will be..
1. 8 EMA
2. 21 EMA
3. Top of cloud
4. Bottom of cloud
But there's one more shown below. The
lagging span shows the close price 26 days behind current action. So if we take the last major low on the chart, look at where that was on the yellow lagging span line, and then line that point in time up with the candle on the same day, THAT CANDLE was predictive of the next significant resistance area. It's not always going to land 100% where that candle was, but IF a new trend were to form, you can almost always bet your ass that level will be hit during the next trend and often act as a general support or resistance area. See the box on the chart below.
Price came and found the same area, which also happened to be after a bullish 8/21 crossover and the top of the cloud, and used that area as resistance. From there, it used the 8 EMA as support to continue riding upward with RSI and MACD in a strong uptrend. This is a way to visualize a potential target from a price reversal once you feel like on is in place. But for it to work, a new trend HAS to take hold. If 21 days go by and it hasn't happened, it likely isn't going to.
So can we use this to project what a downtrend from here might do? Sure! Just take Friday's close, go to the yellow lagging span line, find the candle on that day, and that's the general price level you are looking for. But we also need to make sure we know where the EMA's are so we can look for crossover, and the most important, where the cloud is.
There's one more key about the cloud that is probably the most important. The thinner the cloud, the easier it is to breakthrough. It can breakthrough anywhere, but if it approaches a thin spot, it likes to knife through like butter. In this case, we have 4-5 days of paper thin cloud. If we start a downtrend, it could theoretically get through quickly and be a potentially very bearish signal of a new, longer, deeper, downtrend. But using the chart above, we are aiming for the low $190's in a reversal scenario. And as long as we get there within the next 21 days, we will end up below the cloud forcing the cloud to become resistance and not support as it is right now.
I strongly recommed doing a deeper dive if your interested. This is another powerful trend indicator. Simply having it on your charts is a huge clue as to where you are in the process.
"H-A: In return for the flattery, can you reduce the size of your signature? It's the only part of your posts that don't add value. In its' place, just put "I'm an investing savant, and make no apologies for it", as oldarmy1 would do."
- I Bleed Maroon (distracted easily by signatures)
