Understanding Ichimoku Clouds in Crypto Trading

Understanding Ichimoku Clouds in Crypto Trading

When it comes to cryptocurrency as a legitimate investment, crypto aficionados frequently experience a dilemma. The age-old debate remains: should you invest and forget about it, or should you trade the price swings for even more profit?

According to studies, a basic buy-and-hold strategy for Bitcoin over the last six years would have netted investors a return of 170x. Long-short trading, on the other hand, would have yielded returns of at least 250 times your initial investment, and up to 5,000% with a well-tuned strategy. With those figures in mind, it's easy to be enticed by the promise of trading cryptocurrencies.

But, as simple as it may appear, trading is not for the faint of heart, with even seasoned investors succumbing to unexpected market volatility and price drops — just look at the "Black Thursday" event in March this year, which saw two well-known crypto firms, Cryptolab Capital and Adamant Capital, fold overnight, losing millions of dollars.  

This is where having a defined strategy proves to be useful. A fundamental approach to the crypto market — looking at macro factors, correlations with US equity indices, or Bitcoin miner-driven market movements — or a technical strategy — using indicators and chart-reading to calculate market probabilities and place trades accordingly — are both viable options.

The Ichimoku cloud is one of the popularly used indicators. A so-called all-in-one trading technique, formerly known as Ichimoku Kinko Hyo, was established in the 1940s by a Japanese journalist named Goichi Hosoda. Its name means "equilibrium at a glance," and it enables investors to trade breakouts, determine support and resistance levels, and analyze the market's groupthink behaviour.

The Ichimoku Cloud Strategy has always been a comprehensive framework: it allows for trend analysis, indicates when a trader should exit the market entirely, and offers clear indications with a high possibility of success.

How does Ichimoku Cloud Trading work?

This tool is pretty easy to read and analyse once the different components are singled out

The Cloud (Kumo) - Price always tends to gravitate to the large green and red zones in the chart above, where it either establishes a new trend or is rejected. When trading in this Cloud, markets are frequently directionless and sideways, therefore traders tend to wait out and avoid initiating trades while the price is inside the Cloud.

The cloud is nothing more than a computation of support and resistance equilibriums based on prior price behaviour over "x" periods. In general, the longer the time "x," the lower the chance of a "false" indication (although nothing is crypto in markets).

It's simple to play the Cloud. When the price breaks above the Cloud, traders can go long, on increasing prices, and short on falling prices, if the price breaks below the Cloud. A green Cloud is a "support" region where the price is likely to continue rising, while a red Cloud is a "resistance" area where the price is expected to fall.

Conversion Line (Tenkan Sen) - The Tenkan sen is an indicator line (a 9-period moving average) that estimates the average of the highest high and lowest low over the previous "x" number of candles. The Tenkan sen, according to some traders, provides superior support and resistance points than a simple moving average. The expression for this is an average of 9 day high and low values.

When the Tenkan sen is flat, it suggests that the market is trendless, but an angled Tenkan sen displays the price action's trend and relative momentum. The Tenkan sen, unlike the moving average line, serves as both support and resistance and as a directional indication.

The Kijun Sen or the base line is almost the same as Tenkan Sen but it’s calculated over a longer period (26-period) compared to the former, making it a slower version of the conversion line. Traders have a general rule of going long when the Tenkan Sen crosses the Kijun Sen and going short when the opposite happens.

Senkou Span (Leading Lines) - These are the moving averages of the Tenkan Sen and Kijun Sen lines projected 26 periods in the future. An even wilder Senkou Span is often used, which is a 52-period moving average line.

Chikou Span (Lagging Line) - This takes the current price and subtracts "x" number of candles from it. "Trend confirmation" is the  Chikou span's primary indication and it signifies trend direction when it shifts from above to below (or below to above) the Ichimoku Cloud.

A "bullish" Kumo breakout occurs when the Chikou Span line breaks above the Kumo, indicating a strong buy signal, whereas a "bearish" Kumo breakout occurs when the Chikou Span line breaks below the Cloud, signalling traders to sell and dump their holdings.

The Ichimoku Cloud should now be clear after these five components have been discussed. With only a glance at the chart, a trader can see the trend (or lack thereof), support and resistance levels, and prospective breakouts, making this method a valuable addition to any trader's arsenal. Moreover, C-Trade’s accessible and easy to use UI makes a big difference for new traders looking to dip their toes into Ichimoku Cloud Trading!

How to analyze the Ichimoku Cloud

Traders can begin using this tool by simply heading over to C-Trade’s trading page, clicking on “Indicators” listed on the top panel, and choosing Ichimoku Cloud for technical analysis! This is often used alongside other analysis tools such as moving average, MACD, and volume charts.

The Ichimoku Cloud strategy generates a variety of signals as a result of its many components, but they are generally divided into two types: momentum and trend-following signals.

The interaction between the market price, the Base Line, and the Conversion Line generates momentum signals. When the Tenkan Sen and the market price both move above the Base Line, bullish momentum signals are generated, and when the Conversion Line and the market price both fall below the Base Line, bearish momentum signals are triggered. The crossing of the Tenkan-sen (Conversion Line) and the Kijun-sen (Base Line) is known as a TK cross.

The color of the cloud and the location of the market price in reference to the cloud are used to produce trend-following signals. The cloud color indicates the difference between Leading Spans of different scales.

Simply put, when prices persistently rise above the clouds, the asset is more likely to be in an upward trend, and when they fall below the cloud, it is considered a negative sign, signalling a downturn. With a few exceptions, when prices move sideways inside the cloud, the trend can be deemed flat or neutral.

Another feature that might assist traders in detecting and confirming probable trend reversals is the Chikou Span. It can reveal the strength of price movement, perhaps confirming a bullish trend when rising above the market prices or a bearish trend when moving below. The Lagging Span is usually used in conjunction with the other Ichimoku Cloud components, rather than on its own.

Support - Resistance Levels and signal strength

Support and resistance levels may also be determined using the Ichimoku chart. During uptrends, the shorter Leading Span A functions as a support line, while during downtrends, it acts as a resistance line. The candlesticks tend to travel closer to the Leading Span A but Leading Span B may also operate as a support/resistance level if the price advances into the cloud. Furthermore, because both Leading Spans are forecast 26 periods ahead, traders may predict probable support and resistance zones.

The strength of the Ichimoku Cloud's signals is largely influenced by whether they are in accord with the wider trend. A signal that is part of a wider, well-defined trend will always be more powerful than one that appears unexpectedly in opposition to the current trend.

So a bullish signal that isn't backed by a positive trend might be deceptive. As a result, any time a signal is produced, it's critical to pay attention to the cloud's color and location, as well as the trading volume.

It's worth noting that using the Ichimoku Chart for day trading with shorter periods generates a lot of noise and misleading signals. Longer periods (weekly and monthly charts) offer more consistent momentum and trend-following indications in general.

Ichimoku Cloud Trading: Closing Remarks

After Hosada’s 30 year endeavour in refining the Ichimoku method, it is now used by millions of traders around the world. Ichimoku Clouds are a powerful charting approach for identifying market trends and momentum. Also, traders can use the Leading Spans to predict future levels of support and resistance that have yet to be tested.

Although the charts appear to be too cluttered and sophisticated at first glance, they do not rely on subjective human intervention like other technical analysis approaches. Despite the ongoing discussion about Ichimoku settings, the method is rather simple to implement. But like every other indicator, this should be used alongside other analysis methods to make solid decisions based on technical analysis. It’s generally a good idea to first familiarise ourselves with the more fundamental, easy to use indicators and analysis tools available on C-Trade.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.