The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels as well as momentum and trend direction. It does this by taking multiple averages and plotting them on a chart. It also uses these figures to compute a “cloud” that attempts to forecast where price may find support or resistance in the future.
While the Ichimoku Cloud uses averages, they are different from a typical moving average. Simple moving averages take closing prices, add them up, and divide that total by how many closing prices there are. In a 10-period moving average, the closing prices for the last 10 periods are added, then divided by 10 to get the average. Periods can be adjusted as required.
The cloud is a key part of the indicator. When price is below the cloud, the trend is down. When price is above the cloud, the trend is up.
Traders will often use the Ichimoku Cloud as an area of support and resistance depending on the relative location of price. The cloud provides support and resistance levels that can be projected into the future. This sets the Ichimoku Cloud apart from many other technical indicators that only provide support and resistance levels for the current date and time.
These are the five formulas for the lines that comprise the Ichimoku Cloud indicator. The periods set for each parameter are the default parameters and can be adjusted by hand in the indicator’s settings.
Conversion Line (tenkan sen) = (9-PH+9-PL)/2
Base Line (kijun sen) = (26-PH + 26-PL)/2
Leading Span A (senkou span A) = (CL + Base Line)/2
Leading Span B (senkou span B) = (52-PH + 52-PL)/2
Lagging Span (chikou span) = Close plotted 26 periods in the past
PH = Period High
PL = Period Low
CL = Conversion Line
The highs and lows are the highest and lowest prices seen during the period. In the case of the Conversion Line, for example, these will be the highest and lowest prices seen over the last 9 periods.