The Basics of how to Identify and Read Ichimoku Clouds for Stock Reports

Stock market charts contain valuable information that can be used to describe any sort of trend imaginable. It’s no wonder that market traders have begun to popularize customized systems for examining performance of any given stock. One such system is referred to as Ichimoku Clouds, or “Ichimoku Kinko Hyo” in straight Japanese language, was first popularized in 1968 by Goichi Hosada, a newspaper journalist who actually invented the system before the second world war.

There are actually five lines (Japanese “sen”) to the whole kumo (Japanese for “cloud”), intended to reveal the quality of stock’s performance in select areas at a glance. Knowing those areas is essential to putting an ichimoku graph to effective use and should be used as criterion fully apart from determinacy on what to do about buying or selling any particular stock. It’s nothing more than a useful tool and indicator, but of course it can’t stand alone as an ultimate trading test.

Ichimoku consist of formulated span of two lines A & B (senkou) and resultant range (kumo), further graphed ahead to the trend implied in six months. The calculation results in the plot being offset. Senkou are derived from Tenkan and Kijun, separate lines that do not form a cloud. As a fifth line, Chikou accompanies Tenkan and Kijun as a retro measure of the stock’s closing price commuted from about a month prior.

Senkou lines

A typical session with ichimoku clouds involves a glance at the range of senkou and more precisely the cloud’s location relative to the behavior of the stock’s price. If the stock action is beneath the cloud then the trend is considered bearish. Stock price action above the cloud is interpreted as bullish. Action in the cloud is referred to as “flat.”

Ichimoku make describing the stock action over a given plot of periods (i.e., weeks, months, years, etcetera) a lot more simplified over traditional stock charts and can be an asset when attempting to describe any specific stock’s performance, such as by translating a collection of graph data.

The upper senkou line, line A (or senkou sen A), is calculated from six months of the mean of Tenkou and Kijou action, and the graph is offset to six months later.

Senkou line B is calculated using the mean of stock data highs and lows, respectively, for a year’s time and also plotted six months ahead.

More dramatic indications come when senkou lines reverse their order. If an upward trend shows forth, then A is above B. When B senkou moves above A, the downward trend shows forth.

Tenkan lines

Tenkan lines are formulated from the price of the stock for a fully 9 previous periods, using 9 maximal highs and 9 minimal lows. The formula is (daily high + daily low)/2 iterated for each of the 9 days prior.  Tenkan lines are referred to as “signal lines.”

Kimou lines

Kimou lines called by the name of their role in reading ichimoku, “trend lines,” are typically calculated for the previous 26 days of the stock. The formula is (daily high + daily low)/26, iterated for each of the 26 days prior.

Range is indicated by the two senkou lines, always plotted in mutually exclusive tone or different colors, and the resultant range is instantly useful to determine resistance. The greater the range, the greater the resistance of any particular stock. An entire portfolio, or virtual portfolio such as the S&P itself, can also be modelled using senkou.

Chikou lines

Chikou lines are essential for the ichimoku system to work. They are best understood as “26 days ago, the day’s close was …” The basic idea of chikou is simple to grasp but nonetheless very useful. Because chikou indicates a dated market phenomenon, it’s often called the “lagging line.”

Analysts fond of ichimoku cloud utility have plenty of other observations to share. But at a glance, the basics of the system have received a concise overview. Describing combination readings that occur between the five plots requires a much more in-depth explanation of ichimoku clouds. Succinctly, for a simple way to gain knowledge of trends and to spot indications of resistance or support, it is the very reason that ichimoku clouds have caught on with so many investors both in Japan and worldwide online.