The Ichimoku Cloud indicator is a versatile indicator that can help define possible support and resistance levels. It helps identifies the support and resistance and provides data to help identify the overall direction of price, helps determine the most suitable time to enter and exit the market providing the trend direction. Even though it may seem complicated, it is actually a very straightforward indicator.

The Ichimoku Cloud works by plotting multiple averages on the charts. Then it uses those figures to create a cloud that predicts where the price of a cryptocurrency may find support or resistance in the future.

The Ichimoku has 5 simple components:

1) Conversion Line
2) Base Line
3) Lagging Span
4) Leading Span A (this is what creates the cloud)
5) Leading Span B (this is what creates the cloud)

Conversion Line
The Tenkan-sen line, also known as the Conversion Line shows the short-term price momentum, it’s the mid-point price over the last 9 periods.

The market price above the conversion line shows the possible short-term upward momentum. If the price is below the conversion line, it would signal short-term downward momentum. The conversion line is not typically used on its own, but rather used in conjunction with the other components of the Ichimoku as listed above in the 5 components.

The Conversion Line, is the midpoint of the last 9 candlesticks. This line is calculated using the formula:
[(9-period high+9-period low)/2]

Base Line
The Kijun-sen line or the Base Line shows the support and resistance levels in the medium timeframe. On its own, can be used to find price momentum. If the price is above the Base Line, it means trend and vice versa.

Base Line, is the midpoint of the last 26 candlesticks. This line is calculated using the following formula:
[(26-period high+26-period low)/2]

Lagging Span Line
The Chikou Span, also known as the Lagging Span, is the closing price of the current period. As its name suggests, the lagging span lags behind the price and is projected 26 periods into the past.

Leading Span A
The Senkou Span A, or Leading Span A, forms one of the two cloud boundaries. This line represents the midpoint (or moving average) of the baseline and the conversion line, plotted 26 periods into the future. The Leading Span A is the faster-moving cloud boundary and is calculated using the formula:
[(conversion line+baseline)/2]

Leading Span B
The Senkou Span B, or Leading Span B, forms the second cloud boundary and is the midpoint of the last 52 price bars (or the 52-period moving average). It is calculated using the formula:
[(52-period high+52- period low)/2]

The Leading span B is plotted 26 periods into the future and is the slower cloud boundary.

Kumo Cloud
The Kumo Cloud is located within the space between the Leading Span A and the Leading Span B. The Kumo Cloud gives support and resistance levels that can be projected into the FUTURE. Not many indicators can give a price projection based on the future. It is very different from many other indicators because it provides support and resistance levels for the current data and time considered.

If the Leading Span A is above the Leading Span B, it is an indication that the price of the crypto asset is gaining momentum (shaded green). A downtrend is produced when the Leading Span A is BELOW the Leading Span B line (shaded red). The Kumo cloud is shifted forward 26 periods that provides future support and/or resistance.

How to Interpret the Ichimoku Cloud

Although the Ichimoku Cloud involves five different lines, reading the graph is relatively easy. To interpret the Ichimoku Cloud, start by identifying the Leading Span A and the Leading Span B.

Now that you have an Ichimoku Cloud, you can easily use it to generate momentum and trend-following signals. Here’s how.

Momentum Signals

Momentum signals are generated depending on the relationship between the market price, the Base Line, and the Conversion Line. If either the market price or the Conversion Line, or both of them, move above the Base Line, a bullish momentum signal is produced.

Bearish momentum signals occur when either the market price or the Tenkan-sen, or both of them, move below the baseline.

The crossing between the Tenkan-sen and the Kijun-sen is known as the TK cross.

Trend-Following Signals

Trend-following signals are generated according to the position of the market price in relation to the cloud, as well as the color of the cloud. If the prices are consistently above the cloud, the cryptocurrency is in an upward trend. If the prices are below the cloud, the cryptocurrency is bearish, or in a downward trend. Except for a few exceptions, the market is considered neutral or flat if the price is moving sideways within the cloud.

Another element that can help you spot and confirm a trend reversal is the Chikou Span or lagging span. This line gives you insights into the strength of price action. It may possibly confirm a bearish trend if it moves below the market prices, and a bullish trend if it moves above the market prices. Normally, you will have to use the Chikou Span in conjunction with other components on the Ichimoku Cloud, rather than using it on its own.

You can also use the Ichimoku chart to identify support and resistance zones. The Leading Span A, or green cloud line, usually acts as the support line during an uptrend and as the resistance line in a downtrend. In both cases, the candlesticks will move closer to the Leading Span A.

The Leading Span B can also act as the support or resistance line when the prices are in the cloud. Because both the Leading Span A and the Leading Span B are leading indicators, you can use them to predict future resistance and support zones.

The strength of the Ichimoku Cloud signals depends on whether they match the broader trend. If a signal is part of a larger, clearly defined trend, it is much stronger than a signal that briefly crops up in the opposite direction to the prevailing trend.

In simple terms, if a bullish signal is not accompanied by a bullish trend, the signal is weak. So, before you act on a signal, consider the position and color of the cloud, as well as the volume.

Limitations of the Ichimoku Cloud

One of the downsides of using the Ichimoku Cloud is that the tool depends on historical data. Although this data can sometimes be used to predict the future, there are no guarantees that the past will be repeated.