Ichimoku Cloud: Learning to Trade the Trend

Do you suffer from analysis paralysis? With literally hundreds of technical chart studies available to choose from, it’s not that uncommon. Here’s one potential cure—a single study available on the thinkorswim® platform that can track multiple variables in one view. Called Ichimoku—and known colloquially as the Ichimoku Cloud, or just the Cloud—many use it as a go-to daily chart to view multiple trend indicators before they make a decision on an investment.

Released to the public by Japanese business journalist Goichi Hosoda in the late 1960s, Ichimoku (loosely meaning a “one look” or “one glance”) is a technical analysis tool with multiple indicators that may show whether a security is heading in a bullish or bearish direction. It also locates support and resistance levels as well as crossover buy and sell signals.

What is an Ichimoku Cloud chart?

The Cloud is clearly the most distinctive feature of an Ichimoku chart—formed by two lines projecting the market trend 26 days into the future. But that’s not the only indicator it contains. The Cloud literally floats among other lines of information that can help a trader or investor determine: 

• Trend direction: If an investment’s price is above the Cloud, then its price trend is higher, and if it’s below the Cloud, it’s lower. Ichimoku is different from conventional moving average studies, such as the simple moving average (SMA) or exponential moving average (EMA), because it uses the highest highs and lowest lows during daily trading instead of closing prices. Why this approach? Because highs indicate selling pressure, while lows may signal where buyers are likely to line up. If the price is inside the Cloud, you could expect a period of consolidation—where the price moves sideways within the Cloud’s lines—or a full-blown trend reversal, depending on the circumstances.
• Support/resistance: The lines that make up the top and bottom of the Cloud display daily support or resistance levels. For example, let’s say the trend is higher, so the price is above the Cloud (see figure 1). In any downside correction or reversal, the top of the Cloud will likely act as support and could represent a buying opportunity if the trend is technically still higher. However, a downward shift may indicate larger, potentially negative external factors at work, such as a poor earnings report or negative guidance. In this case, the bottom of the Cloud becomes the next major source of support, while the top of the Cloud should cap any rebounds.

Getting started with Ichimoku charts

Step 1: Begin on thinkorswim

Open the thinkorswim desktop (mobile instructions will vary) and select the Charts tab. Enter the symbol for the investment you want to analyze at the upper left side, then look for the beaker symbol at the upper right—the Studies tab. Select and a drop-down menu will appear—select Add Study, then on the immediate left, All Studies, which will display an alphabetical list. Under H-L, select Ichimoku, and your chart will appear.

Step 2: Learn the components

For a first glance at “one-glance” Ichimoku charting, let’s get an overview of the study’s main components. The following chart tracks the midyear 2023 performance of the S&P 500® index (SPX).

Step 3: Learn your Ichimoku lines

As shown above, an Ichimoku chart is composed of five different lines:

• Tenkan line: Think of the Tenkan (blue line) as the fast-moving average. It’s based on the average of the highest high and lowest low over the last nine trading days. It frequently acts as the line of immediate support or resistance when an investment moves up or down. When a security’s price moves above or below the Tenkan, it could signal that a bearish or bullish trend is ending or entering a corrective phase. Crossovers between the Tenkan line (fast) and the Kijun line (slow) are more significant and may signal a trend change or a tradeable move.
• Kijun line: The Kijun (pink line) is the slower moving average. It’s based on the average of the highest high and lowest low over the last 26 trading days. The Kijun line also acts as support or resistance, but significantly, the Kijun line can act as the last line of support or resistance before the Cloud and will frequently limit the price move in a reversal. For example, when a downward correction interrupts an overall uptrend, after a break below the Tenkan line, the Kijun line is the next point of support. Trend followers will note that a test of the Kijun line could represent a chance to get in on an upward trend, a higher level to raise your stop loss near to, or a place to take profit on any shorts established when the bearish Tenkan/Kijun crossover signal emerged. At the same time, a break below the Kijun line could signal a further retracement lower (see figure 1) with the Cloud in sight as the next source of support. 
• Senkou A: It’s one of two lines that form the Cloud itself and represents the average of the Tenkan and Kijun lines projected 26 days into the future. Senkou A forms either the top or the bottom of the Cloud and can act as support or resistance.
• Senkou B: It’s the second line that forms the Cloud and shows the average of the highest high and lowest low of the last 52 days, projected 26 days into the future. Senkou B also can form the top or bottom of the Cloud and can act as support or resistance in either position. When Senkou A is above Senkou B, it indicates an uptrend and will turn the interior of the Cloud green. If Senkou B is above Senkou A, it indicates a bearish trend, turning the Cloud dark red (see figure 1).
• Chikou line: The Chikou (red line, also known as lagging line) helps confirm the trend. The Chikou is the current price pushed back 26 trading days. If the Chikou is above the price from 26 days ago, it confirms an uptrend, meaning price has since moved higher from 26 days before, as one would expect in an uptrend. If the Chikou is below the prices of 26 days ago, it signals confirmation of a downtrend. 

Step 4: Know the Ichimoku’s limitations

It’s important to note that an Ichimoku study can be built at any point in the day, but it’s best to build and view it after the close. That’s because intraday price moves could break an Ichimoku line, only to reverse later and leave the line intact on a closing basis. Traders can certainly rely on other intraday charts to inform their decision-making.

As with most moving average studies, the Ichimoku study is prone to false breaks of the key lines, especially on an intraday basis. But the deciding factor comes down to the closing bell and whether price has broken the relevant line on a closing basis (more on that below).

The Ichimoku is regarded as a long-term study of trending behavior, and trend-following traders should exercise patience until the price closes above or below the relevant line at the close. For example, say that the price is above the Cloud (uptrend) but price closes below the Kijun line. That would be a signal to consider taking at least a partial profit on a long position, or even exit the long position entirely. More aggressive traders could consider entering a short position in anticipation of a decline to the top of the Cloud.

Ichimoku in action

Let’s look at a stock chart for Nvidia (NVDA), a leading technology stock. We’ve highlighted an area in the red oval in Figure 2 where both the Tenkan and Kijun lines are tested as the uptrend is showing signs of losing momentum. Note how frequently the price candlesticks exceed the Tenkan line, but always closes above or below it, showing its role as support and resistance.  Looking ahead, if the Tenkan line makes a bearish crossover of the Kijun line on a daily close basis, a test of the cloud top is highly likely. But for now, the trend is still higher, so a trader would stay with the trend while remaining on guard for any potential bearish crossovers.  

Further, the table below detail’s figure 2’s indicator lines and daily close.

The bottom line

Ichimoku charts may seem complicated at first, but they deliver a range of in-depth, useful signals for traders on price performance and momentum. If you want to make the Ichimoku Cloud study a regular part of your daily technical analysis routine, consider practicing with the thinkorswim paperMoney® feature and start with a stock or exchange-traded fund you’re interested in tracking.  

As you note the key levels of the Ichimoku lines—Tenkan, Kijun, Senkou A and B, and Chikou—you’ll be looking for price levels to enter or exit major trends. However, Ichimoku isn’t meant to be the only chart you use. There are many other technical analysis tools to access on thinkorswim to help you make decisions and potentially set stop levels as needed.