Using the Ichimoku cloud for crypto trading signals

In Trading

First question: What is the Ichimoku cloud?

The Ichimoku cloud is a trading indicator that helps discern market trends. At first glance it can appear intimidating – but once you understand what the different parts are showing, it’s a great snapshot of what's happening in the market.

The Ichimoku cloud comprises five different elements.

The cloud is a shaded area between two lines known as Senkou Span A and Senkou Span B.

There are then two moving average lines: a long moving average (long MA) and a short moving average (short MA). The default periods for these two lines are 26 and 9 respectively.

Finally, the lagging span line follows market price but is moved 26 periods to the left.

In this blog, these are the colours each line is represented by:

  • Senkou Span A - Light red
  • Senkou Span B - Dark green
  • Long MA - Dark red
  • Short MA - Blue
  • Lagging span - Light green

Span A and Span B will always have the shading between them, unless you have purposefully turned it off. 

Ichi labels

The Ichimoku cloud is a popular trading indicator, originating from Japan, that is used for trading all kinds of assets.

Despite its formulation in traditional markets, it can provide powerful trading indicators in cryptocurrency. Markets are fueled by the same drivers, irregardless of asset type, largely due to human psychology.

As always, indicators should be used in conjunction to generate more reliable trading signals.

Using the Ichimoku cloud to trade cryptocurrency

Since this indicator is comprised of a few different components, you will take them all into account in your trading.

The cloud

The cloud portion of the indicator refers to the shaded area between the two Senkou Span lines. The cloud is recognized as an area of support or resistance.

If you need to brush up on your support and resistance knowledge, check out this blog post.

Notice how in the picture below the cloud is tested as resistance multiple times prior to a large price drop. At the bottom price rises and tests the resistance again. This shows how you can interpret the cloud in your trading as a possible support or resistance level.

If the price is above the cloud this signifies a general bullish trend. Conversely, if the price is below the cloud it signifies a slight bearish trend.

Some traders tend to only open longs when price is above the cloud and shorts when price is below the cloud. This is called trading with the prevailing trend.

Crosses

There are lots of crosses to watch out for with the Ichimoku cloud, since there are a lot of lines interacting with each other. The relationship and positioning between all of the lines matters.

When a market is trending upwards the order of lines should be, from highest to lowest: lagging span, fast MA, long MA, cloud. In a downtrend the order is reversed: cloud, long MA, fast MA, lagging span.

This picture shows five lines in an uptrend order.

Crosses of the cloud matter too. When span A is higher than span B the cloud will be green by default, which will occur in uptrending markets. If span A is below span B the cloud will be red, representing downtrending markets. A cross of the cloud signifies a change in trend.

Moving averages

Look out for the positioning of the two moving averages. If the fast MA is above the long MA this signifies a strong uptrend. The inverse is also true.

Therefore, when the fast MA crosses above the long MA it is a bullish signal. When the fast MA falls below the long MA it is a bearish signal.

Think about combining these signals. Traders tend to use this signal in conjunction with the relationship between the price and cloud. If price is above the cloud, that’s bullish. If price is above the cloud and the fast MA then crosses the long MA, that’s two bullish signals which may cause traders to open long positions.

This picture shows a bullish cross of the mover averages prior to a large uptrend.

A move of the long MA above the lagging span is a bearish signal. If the long MA moves above the cloud, it’s a bullish signal.

Lagging span

The lagging span is used to show a general trend. If it is the highest line, this signifies a bullish trend, whereas if it’s the lowest line this is bearish.

The lagging span crossing the fast MA can provide strong trading signals. If the lagging span crosses above the fast MA that is a strong bullish signal. Inversely, when the lagging span crosses below the fast MA it’s a strong bearish signal.

Notice how the lagging span goes from the lowest line to the highest line in the picture below. It shows the successful follow through of a bullish signal.

Location of the spans

Look out for the Senkou Span locations. If span A is the highest or lowest line this signifies consolidation or transition of a trend.

One the other hand, if span B is the highest line this signifies a strong downtrend. Similarly, when span B is the lowest line this shows a strong uptrend.

Summary

There are lots of lines, crosses and interpretations to remember when you are using the Ichimoku cloud.

Here are some key takeaways:

  • The cloud can act as support and resistance
  • In uptrends the order should be: lagging span, fast MA, long MA, cloud, from highest to lowest

Bullish signals:

  • Price above cloud
  • Fast MA crosses above long MA
  • Long MA crosses above the cloud
  • Lagging span is the highest line
  • Lagging span rises above fast MA
  • Green cloud

Bearish signals:

  • Price below cloud
  • Fast MA falls below long MA
  • Long MA falls below the cloud
  • Fast MA moves above lagging span
  • Lagging span is the lowest line
  • Red cloud

Not all signals are strong signals. Signals should always be used in conjunction with other analysis to generate trading decisions.

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.