The Ichimoku Cloud is a TA indicator that combines many indicators in a single chart. Among the indicators we’ve discussed, the Ichimoku is certainly one of the most complicated. At first glance, it may be hard to understand its formulas and working mechanisms. But in practice, the Ichimoku Cloud is not as hard to use as it seems, and many traders use it because it can produce very distinct, well-defined trading signals.
As mentioned, the Ichimoku Cloud isn’t just an indicator, it’s a collection of indicators. It’s a collection that provides insights into market momentum, support and resistance levels, and the direction of the trend. It achieves this by calculating five averages and plotting them on a chart. It also produces a “cloud” from these averages which may forecast potential support and resistance areas.
While the averages play an important role, the cloud itself is a key part of the indicator. Generally, if the price is above the cloud, the market may be considered to be in an uptrend. Conversely, if the price is below the cloud, it may be considered to be in a downtrend.