The Ichimoku Cloud is a technical analysis method that uses sets of moving averages to produce key levels in the past, present, and future. The Cloud helps traders identify at a single glance if a security or other financial product is trading in bullish or bearish territory. Ichimoku Kinko Hyo literally translates to ‘One Glance Equilibrium Chart’ because it can be used for analysis using only a glance. For this reason, the Cloud is one of the most efficient technical indicators available.
The Ichimoku Cloud is made up of 6 key components, each of which we will examine individually. When these 6 components are combined, they form the Ichimoku Cloud. As can be seen below, the Cloud is actually a forward-looking indicator. The Cloud is projected 26 periods forward, so the levels under the current price were formed 26 days ago. The Cloud is unique in that is uses both past data and forward-looking levels. Since the levels are forward looking they tend to be more reliable than simple moving averages. The lagging indicator component also provides confirmation of breakouts by looking 26 periods back to determine if a stock is likely to break through levels. It is this concept of looking at the past, present and future that makes the Cloud so valuable.
AAPL Stock on the Daily Bar with the Cloud:
The Ichimoku Cloud is made up of 6 individual components. Each is calculated and plotted differently and each one tells us something different. Here we will discuss how each component is calculated and what it is used for.
The 6 components:
1. The Tenken-Sen Line
2. The Kinjun-Sen Line
3. Senkou Span A
4. Senkou Span B
6. Chinkou Span Line
These 6 components all have unique formulas that are used to calculate them:
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