ichimoku-clouds-basics — technical analysis and indicators

The Ichimoku Kinko Hyo (translated as "one glance equilibrium chart") is a technical indicator system developed by Japanese journalist Goichi Hosoda in the 1930s, published in 1968 after 30 years of refinement. Unlike single-line indicators, Ichimoku combines five components to provide trend direction, momentum, and support/resistance levels in one view.

The Five Components

Each component serves a specific purpose. Understanding what each line measures is essential before interpreting their interactions.

1. Tenkan-sen (Conversion Line)

Formula: (9-period High + 9-period Low) / 2

What it measures: Short-term price midpoint over the last 9 periods. This is not a moving average of closing prices; it tracks the midpoint of the high-low range.

Default period: 9

Interpretation: When price is above the Tenkan-sen, short-term momentum is bullish. The line also serves as minor support during uptrends and resistance during downtrends.

2. Kijun-sen (Base Line)

Formula: (26-period High + 26-period Low) / 2

What it measures: Medium-term price midpoint over the last 26 periods.

Default period: 26

Interpretation: This is the more significant equilibrium line. Price above Kijun-sen indicates medium-term bullish bias; price below indicates bearish bias. The Kijun-sen often acts as stronger support or resistance than the Tenkan-sen.

3. Senkou Span A (Leading Span A)

Formula: (Tenkan-sen + Kijun-sen) / 2, plotted 26 periods ahead

What it measures: The average of the short-term and medium-term equilibrium lines, projected forward.

Interpretation: Forms one boundary of the cloud. When price is above Senkou Span A, this line provides support.

4. Senkou Span B (Leading Span B)

Formula: (52-period High + 52-period Low) / 2, plotted 26 periods ahead

What it measures: Long-term price midpoint, projected forward.

Default period: 52 (for calculation), plotted 26 periods forward

Interpretation: Forms the other boundary of the cloud. This line moves more slowly and provides stronger support/resistance than Senkou Span A.

5. Chikou Span (Lagging Span)

Formula: Current closing price, plotted 26 periods behind

What it measures: Current price relative to price action from 26 periods ago.

Interpretation: When Chikou Span is above the price from 26 periods ago, momentum confirms the uptrend. When below, momentum confirms the downtrend.

The Cloud (Kumo)

The space between Senkou Span A and Senkou Span B forms the "cloud" (Kumo). The cloud is the most distinctive feature of Ichimoku charts.

Cloud characteristics:

Bullish cloud: Senkou Span A is above Senkou Span B (cloud is typically shaded green)
Bearish cloud: Senkou Span B is above Senkou Span A (cloud is typically shaded red)
Cloud thickness: Thicker clouds represent stronger support/resistance; thin clouds are easier to penetrate
Cloud twist: When Senkou Span A crosses Senkou Span B, the cloud changes color, signaling potential trend change

Support and resistance zones:

The cloud acts as a support zone during uptrends and a resistance zone during downtrends. Rather than a single line, it provides a range where price may find equilibrium.

Interpreting Trend Direction

Strong uptrend indicators:

Price is above the cloud
Cloud is bullish (Span A above Span B)
Tenkan-sen is above Kijun-sen
Chikou Span is above price from 26 periods ago

Strong downtrend indicators:

Price is below the cloud
Cloud is bearish (Span B above Span A)
Tenkan-sen is below Kijun-sen
Chikou Span is below price from 26 periods ago

Neutral or transitional:

Price is inside the cloud
Cloud is thin or twisting
Tenkan-sen and Kijun-sen are crossing frequently

Worked Example

Consider a stock with the following current values:

Current price: $67.50
Tenkan-sen (9-period): $66.80
Kijun-sen (26-period): $64.50
Senkou Span A (projected): $65.65 [($66.80 + $64.50) / 2]
Senkou Span B (projected): $62.00
Chikou Span: $67.50 (current price plotted 26 periods back)
Price 26 periods ago: $61.00

Analysis:

Price vs. Cloud: Current price ($67.50) is above both Senkou Span A ($65.65) and Senkou Span B ($62.00). Price is above the cloud: bullish.
Cloud structure: Span A ($65.65) is above Span B ($62.00). Cloud is bullish (green).
Tenkan vs. Kijun: Tenkan-sen ($66.80) is above Kijun-sen ($64.50). Short-term momentum is bullish.
Chikou confirmation: Current price ($67.50) is above price from 26 periods ago ($61.00). Momentum confirms uptrend.

Conclusion: All five components align bullishly. This represents a strong uptrend signal.

Support levels:

First support: Tenkan-sen at $66.80
Second support: Kijun-sen at $64.50
Cloud support zone: $62.00 - $65.65

A stop-loss might be placed below the Kijun-sen ($64.50) or below the cloud ($62.00) depending on risk tolerance.

Signal Types

Tenkan-sen / Kijun-sen Cross

Bullish cross: Tenkan-sen crosses above Kijun-sen Bearish cross: Tenkan-sen crosses below Kijun-sen

Signal strength depends on location:

Cross above the cloud: Strong bullish signal
Cross inside the cloud: Neutral; wait for confirmation
Cross below the cloud: Weak bullish signal (in downtrend context)

Cloud Breakout

Bullish: Price breaks above the cloud from below Bearish: Price breaks below the cloud from above

The thicker the cloud, the more significant the breakout.

Chikou Span Confirmation

Use Chikou Span to confirm signals from other components. If Tenkan-sen crosses above Kijun-sen and Chikou Span is above past price, the signal is confirmed.

Limitations and Risks

Lagging nature. Ichimoku uses historical price data. By the time all components align bullishly, a significant portion of a move may have occurred.

Default settings may not suit all timeframes. The original 9-26-52 settings were designed for Japanese markets that traded six days per week. Some traders adjust to 7-22-44 for five-day markets or other variations.

Complexity can lead to paralysis. With five components and multiple signal types, contradictory readings are common. Not every component will align at all times.

Cloud as support/resistance is a zone, not a precise level. This imprecision makes tight stop placement difficult.

Works better in trending markets. In sideways, choppy conditions, price may repeatedly enter and exit the cloud, generating false signals.

Practical Guidelines

Avoid trading when:

Price is inside the cloud (trend unclear)
Cloud is thin and frequently twisting
Tenkan-sen and Kijun-sen are flat and close together

Higher probability setups:

All five components align in the same direction
Cloud is thick, providing clear support/resistance
Chikou Span has clear space (not intersecting past price action)

Stop placement:

For longs: Below Kijun-sen or below the cloud
For shorts: Above Kijun-sen or above the cloud

Next Steps

Add the Ichimoku indicator to a charting platform and identify the five components on a daily chart of a stock or index you follow
Determine whether current price is above, below, or inside the cloud, and note the cloud color (bullish or bearish)
Check the relationship between Tenkan-sen and Kijun-sen to assess short-term momentum direction
Look back at Chikou Span and identify whether it is above or below the price action from 26 periods ago
Practice on historical charts by finding points where all five components aligned and observing what happened next

Related: Breakout and Breakdown Confirmation Rules | Market Breadth Indicators to Watch | Moving Averages: SMA, EMA, and WMA Use Cases

Source: Hosoda, Goichi. Ichimoku Kinko Hyo (1968). StockCharts.com, ChartSchool: Ichimoku Cloud.

Ichimoku Clouds Basics