The Ichimoku Cloud is a multi-faceted indicator. When applied, the indicator unveils numerous data points, such as support and resistance, momentum, and the direction of the overall trend. The indicator derives its name from the cloud-like formation that serves as a forecasting tool for future support and resistance zones.
How to use the Ichimoku Cloud
The Ichimoku Cloud has five lines that consist of the following:
- Nine-period average
- 26-period average
- Average of the two above lines
- 52-period average
- Closing price line
Despite using numerous averages and moving averages, the most important part of reading the Ichimoku cloud is the cloud itself. Reading the cloud is straightforward: when prices are above the cloud, the trend is up; and when prices are below the cloud, the trend is down.
The most common use of the Ichimoku Cloud is to use it for forecasting future support and resistance areas. The cloud becomes an area of resistance when prices are below it and support when prices are above it.
Weaknesses of the Ichimoku Cloud
Despite having a robust and flexible use case, the Ichimoku cloud is not without its weaknesses. Firstly, the indicator can at times look confusing and unintuitive to the inexperienced user. This problem can largely be mitigated by focusing on the cloud itself and not all of the moving averages.
Another weakness of the Ichimoku Cloud is that it uses past data for extending the cloud into future prices. It’s important to note that the cloud itself is simply composed of moving averages and do not have inherent predictive value.
The other weakness of the cloud is that it can become an irrelevant feature on the chart if prices continue to trade above or below it.
In short, the Ichimoku Cloud is a powerful trend-following tool that can help you see future support and resistance zones through the aid of moving averages.