How to Trade with the Ichimoku Cloud

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Video Transcription:

Hello, traders. Welcome to Daytrading Binary Options. In this lesson, we
are going to teach you, how to trade with the Ichimoku cloud. The Ichimoku
cloud can be a little bit overwhelming at first, but let me tell you it’s a
very straightforward indicator.

First of all, what is the Ichimoku cloud, or Kumo? This chart was developed
by a Japanese journalist in the last 1960s. Yes, a Japanese journalist. It
is actually a chart within a chart. I’ll explain this to you later.

The main purpose of the cloud is to help you identify the overall direction
of the trend, but it also helps you to spot areas of support and
resistance, where price might reverse from its current direction.

Now, here are some examples of charts using the Ichimoku cloud. Here, you
can see that we are in a clear downtrend, and this is what we call the
Kumo, or the Ichimoku cloud. Okay? When you plot it on your chart, this is
what you will be looking for.

You can see that we are in a clear downtrend. Every time price rallies to
the cloud, it finds resistance to continue to the downtrend. Here is an
example of the cloud in an uptrend. You can see that here, we corrected to
the downside, right into the cloud to find support and continue to the
upside, in a very normal option.

So the Ichimoku cloud, when it’s plotted on the chart in a downtrend, it’ll
be orange, and in an uptrend, it’ll be blue. Now, the cloud-based signals
are the first signals we’ll be looking for with the cloud. Since the
Ichimoku cloud is a directional tool, it can show us areas or zones of
reversal.

When we have a reversal in the trend direction, we can counter-trend trade.
So a bullish signal occurs when price moves above the cloud, and a bearish
signal occurs when price moves below the cloud. As we said before, since
the cloud is a directional instrument and in a very steep up-move or down-
move, when price corrects back to the cloud and finds support or
resistance, we can fairly assume that when price moves above or below the
cloud, we have a signal to either buy calls or puts.

Let’s have a look at an example of a bullish signal. As you can see here,
we are in kind of a choppy but very interesting downtrend, because we are
making lower lows and lower highs. We are in a downtrend, and of course,
the cloud is orange. We are finding resistance, and the cloud continues
with the move down.

All this indicates that we are in a down-move. But here, when price crosses
above the cloud and finds support at the cloud, we can fairly assume that
the trend has changed, and we have shifted from a downtrend to an uptrend.
Then when the cloud starts to turn blue and move to the upside, we can
assess that the actual trade is in the right direction.

Now, let’s have an example of a bearish signal. It is basically the same,
but the opposite. In an uptrend, as you can see here, we are in an uptrend.
The cloud is blue, and we are finding support in the cloud. Right? We are
making higher highs and higher lows. But when we cross below the cloud and
we start making lower lows, and we retrace back to the cloud and find
resistance now in the cloud, and the cloud paints orange, we have now a
bearish signal to buy puts. Okay?

Now, you can be aggressive in order to buy calls or puts here. Just buy
when it crosses above the cloud or below the cloud, like we pointed out
here. But what you need to do is wait for price to retrace . . . Well, when
we are in a bullish signal, we need to wait for price to cross over the
cloud and then retrace back and find support in the cloud, for us to be
able to buy calls. Okay? Because normally when price breaks through a very
strong level, it will retrace back and test it to the other side.

On a bearish signal, it is the same. When price crosses below the cloud, we
wait for price to test or find resistance at the cloud, for us to be able
to buy puts. Okay? So this is the first signal we’ll be looking for.

Now, there’s a second signal that we’ll be looking for. Here, we are going
to plot two lines into the Ichimoku indicator. Okay? The conversion and the
baselines. The Ichimoku indicator also uses two lines called the Kijun-sen
or Base line and the Tenkan-sen or Conversion line.

The baseline is the average of the highs and lows of the last 26 periods,
and the conversion line is the average of the highs and lows of the last
nine periods. So they are not moving averages because they are calculated
differently, but they do average the highs and lows of the last 26 periods.
So one will be following price more. One will be following price closer
than the other and will be reacting faster to price fluctuations than the
other. Of course, this one will be the conversion line.

Now, these two lines are used to identify bear and bull signals with each
crossover. Let’s go through the bullish signal. Now, we are in an uptrend.
We have plotted the baseline, which is the blue line, and the conversion
line, which is the black one. A bullish signal occurs when the conversion
line, or the faster line, crosses below, in an uptrend of course, crosses
below the baseline and then crosses back above the baseline. When this
happens, we have . . . First of all, when it crosses below, we have the
setup. When it crosses above, we have the confirmation for us to buy calls
on whatever instrument we’re trading.

Here, we have the second signal of this option. Price crosses below the
baseline, finds support at the cloud, and then crosses violently above
again. So now, these are the other kind of bullish signals that we’ll be
looking for with the Ichimoku cloud.

On the bearish side, of course, when the conversion line crosses above the
baseline and then crosses below, we have signals to buy puts. Okay. So this
is fairly easy to understand. When the cloud is blue, we are in an uptrend.
So we’ll be looking for the conversion line to cross below and back up. On
a down move, the cloud will be orange. So we’ll be looking for the
conversion line to cross up and then back down, for us to be able to buy
puts.

The third kind of signal we’ll be looking for is a signal with price and
baselines. Okay? So there is a second type of setup that we’ll be looking
for, using candlesticks and the baseline. A bullish signal occurs in an
uptrend, when price moves below the baseline on a correction that
represents a short-term oversold condition. When it crosses back up or back
above the baseline, we have a signal to buy calls.

On the bearish side, in a downtrend, when price moves above the baseline,
it represents a short-term overbought condition in a correction. When it
crosses back below, we have a signal to buy puts. So basically this is kind
of the conversion and baseline signals, but in this case, we are using the
actual candlesticks or price action for confirmation.

Let’s have a look at a bearish signal. Here, we are in a down-move. Right
here, we see that price crosses above the baseline and then crosses below
it. Okay? Now, we have a signal to buy puts in this instrument, and we have
another one right here, when price corrects to the upside and then
violently crosses to the downside.

You can tell . . . Well, you can say that here we have a correction and a
cross below the baseline, but remember that you have to be picky with your
setups because this was actually a fake setup, because the . . . When price
crossed below again on the baseline, it wasn’t as strong as the second case
or the third case. So you need a clean crossover for you to be able to buy
your options.

On the bullish side, when the cloud is blue and you have a correction to
the downside and price crosses below the baseline, you have the setup. The
confirmation is when price crosses back above it. Here, you have another
one. As you can see, it can take either one candle or one week to the
downside, or it can take a few candles for your setup to be complete. Okay?

Now that we have learned this, we can go to the charts or the empty floor
platform to look at some life setups. Okay. So here’s the empty floor
platform. We’re going to go and look at the New Zealand dollar/US dollar
one-hour chart. So here, we have the naked chart. What you do is you go to
the plus sign, to your add indicator button. You go to oscillator, and you
go to Ichimoku Kinko Hyo.

Now, the up-Kumo and down-Kumo are the lines that form the cloud. Here, we
have the Tenkan-sen and the Kijun-sen. Okay? We’re going to give them some
colors, and we’re going to accept it.

Now, this is how the Ichimoku cloud looks on a chart. As you can see here,
we have thickened a little bit the baseline and the conversion line, but
I’m going to put it on the actual thickness that I want.

Now, here we have what we call a simple cloud crossover signal. Okay?
Here’s the first crossover that you have. When you have the crossover
signals, you don’t pay much attention to the baseline or the conversion
line because as you can see clearly here, you are in a downtrend because we
are finding resistance at the cloud, and the cloud is orange. Even though
here the cloud turns blue for a while, it doesn’t matter because we are
still trading below the cloud. As you can see, the cloud here returns to
its color.

But when we cross over, we have a clean crossover here. Okay? Then if you
see this candle . . . Let me thicken this up for you guys. If you see this
candle right here, we have the clean breakout. Then we have a dodgy, and
then we have this candle that touched the cloud and tested as support. When
this happens, we have a signal here to buy calls at the base of the cloud.
As you can see, price moved all the way up here before correcting. So this
is a clean cloud crossover.

Now that we are in an uptrend, guys, you can look for opportunities to buy
again calls. We have here a conversion line that crosses below the
baseline. As you can see here, we don’t cross above just yet. Here we touch
it, and here we continue to trade below the conversion line, below the
baseline.

Here, we are trading inside the cloud. When we are trading inside the
cloud, it means that we are in a range [inaudible 00:12:37] market. Okay?
Here, we have a crossover when the candle actually crosses above the
baseline and above the cloud. Here, you have a signal to buy calls on the
New Zealand dollar/US dollar one-hour chart.

If you are actually trading or analyzing price action on the price action
on the one-hour chart, you might as well choose to trade the end-of-day
expiration options. As you can see, it took a while, but the trade finally
expired in the money.

Again, we continue to be in an uptrend. Here, we had actually central bank
news. If you are not as advanced of a trader to trade news, it’s better
that you just stay away from high-impact events. This wasn’t tradable
actually because we don’t have a clean setup with the Ichimoku cloud on
this case.

Here, we have another one. This we actually took. Today’s Sunday. The
market just opened. As you can see here, on Friday the conversion line
crossed below the baseline. We were trading below the baseline also. Today,
we actually had a nice open. The conversion line crossed above the baseline
right here. So when this candle closes, we have a clear signal to buy
calls.

Since this is the one-hour chart, we are trading the end-of-day expiration
options. Okay? As you can see, we are very clearly moving up, about to take
this high and actually about to take out this resistance area. So as you
can see, the Ichimoku signals are very straightforward. Once you practice
enough, you will be an expert, and you will not miss one single market
move.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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