Cryptocurrency Trading with the Ichimoku Cloud
Image: ETPUSD chart from Bfx with the default Ichimoku settings.
Ichimoku Cloud is one of the most popular technical indicators cryptocurrency traders use. It is useful for trading markets that are visibly trending, you won’t get much useful information from Ichimoku in ranging markets. There is a number of strategies for trading Ichimoku, some of them are explained by other people and linked at the bottom of the article.
It is rarely used alone - typically, traders will use it combined with other popular indicators.
Indicators popular in cryptocurrency trading
- Volume, either in the standard way or as volume colored candles available from TradingView
- StochRSI looking for divergences
- Fibonacci to look at the most likely turning points
- Bollinger Bands
About the Ichimoku Cloud
Since you’re here you probably have the idea what the cloud is but here’s a good definition from Stockcharts on Ichimoku cloud:
Ichimoku Kinko Hyo translates into “one look equilibrium chart”. With one look, chartists can identify the trend and look for potential signals within that trend. The indicator was developed by Goichi Hosoda, a journalist, and published in his 1969 book. Even though the Ichimoku Cloud may seem complicated when viewed on the price chart, it is really a straight forward indicator that is very usable. It was, after all, created by a journalist, not a rocket scientist!
Ichimoku cloud gets used by many cryptocurrency traders but in the crypto space it’s almost never used in its default setting. The reasoning for it is the default setting is crafted for markets that only open Monday to Friday, whereas crypto trades all the time – more about the Ichimoku cloud settings for crypto here.
Lines on Ichimoku cloud explained like you’re five
Ichimoku cloud uses past action of the market to predict future most likely direction along with support and resistance areas. It is rendered from simplified past moving averages calculated from past highs and lows. There are two lines that form something akin the classic fast-slow MA lines where traders follow the line crosses. Another slightly different fast-slow pair is added and shifted into the future to form the actual cloud - green or red, based on whether the slow or the fast line is on the top. The last line is the simple price action represented by candle closes plotted in line and shifted into the past. StockCharts has more if you need to know.
The strange Japanese names of the Ichimoku lines:
The Senkou span are the borders of the (here) green cloud. It is green in this case as the market is bullish. It will be red in bearish markets when the two spans swap. The space between the lines is called kumo. Senkou spans are major support/resistance lines - they attract the price, traders set their entries, exits and stops around them.
Kinjun and Tenken lines are “balance” lines - fast and slow moving averages. They are moving averages so traders watch out for their cross when they are looking for a trend reversal. Because of their names Tenken and Kinjun the cross is sometimes called “TK cross”. They are also important when there is no cross in sight. If the price keeps around them, it is not overhyped nor underpriced. If it gets distant it signifies the price is way out of balance and a pullback is likely. In more mature markets the price stays around these lines and traders watch how it is bouncing off them or crossing them when they are looking for a good entry.
The Chinkou line is a lagging indicator. You can use it to confirm a trend strength.
The lagging line above the candles means bullish momentum and below bearish momentum - here a LTCUSD 2H chart.
When there is a strong action and the lagging line crosses the candles it is a sign the trend is weakening and becoming undecided - here on a SANUSD 2H chart.
It is just a very generic momentum strength indicator though, the lagging span location or cross alone is not enough to enter or exit.
Ichimoku cloud settings for crypto trading
Because Ichimoku cloud takes the past action to predict the most likely future ranges and breaking points, traders want to reflect the past action as precisely as possible. Ichimoku works with timely moving averages, so most of all it’s important to set meaningful timespans considering the fact that cryptocurrencies trade 24/7/365.
The default parameters of the cloud are 9, 26, 52, 26 but you will mostly find that crypto traders set them to 20, 30, 120, 60.
Originaly Ichimoku settings (9, 26, 52, 26) represents parameter by parameter:
- 9 represents a week and a half of trading
- 26 equals the number of trading days in a typical month (30 minus four Sundays)
- 52 equals two months of trading days
For cryptocurrencies the market is open all the time, so the math goes:
- 7+3.5 = 10 (because of low volume on Sunday), or double for longer term trend capture
- 30 days in a month
- 2 trading months in crypto = 60 days
Some traders reject this alternative crypto Ichimoku settings. Their reasoning is that the period lengths are meant to capture a time period, it doesn’t matter whether it falls into a week or not and changing the defaults is wrong. That is different from what StockCharts article about Ichimoku says and it seems a bit ignorant to disregard movements influenced by the day of the week but if big enough traders start to use the default settings it might be valuable to check both settings.
Ichimoku cloud settings for cryptocurrency trading:
|Conversion line period||20|
|Base line period||30|
|Lagging span 2 periods||120|
Video Intro into Ichimoku Cloud from Youtube by @CarpeNoctom
How to read Ichimoku cloud:
BASICS: Ichimoku cloud Bullish signals
For a strong bullish signal, everything must occur above the Kumo cloud: The price action must remain above the Kumo cloud. The Chinkou line must stay above the kumo and Tenken should be crossing Kinjun also above the Kumo. Tenken should be crossing upside - if this cross occurs inside of the Kumo that’s still weakly bullish.
BASICS: Ichimoku cloud Bearish signals
If you are looking for strong bearish signal, with Ichimoku cloud you can pretty much reverse all that has been said to bullish signals - price action occurs below Kumo, as well as Tenken and Kinjun crossing and the lagging line Chinkou. Basically the more happens below the stronger the bears are.
BASICS: None of this?
If none of this is happening then it most likely means that at your timeframe the market is undecided, sideways, waiting for direction. You can tell a ranging market from the cloud easily by a sequence of alternating cloud colours - alternating green and red kumo clouds with the market not really going anywhere.
Ichimoku Cloud Traders: What to read and whom to follow
ChaosTrader63 has a YouTube channel and Twitter dedicated to Ichimoku cloud. He mainly provides price commentary with new videos about once a week, and his trades are focused more on the long term. You will see him use the 1D chart a lot, explaining how he makes his decision. ChaosTrader63 uses the default Ichimoku settings - 9, 26, 52, 26 and is a proponent of this settings rather than of the “crypto” settings.
ChaosTrader63 is originally a forex trader so his analysis has more precision in it than what you typically get in the cryptocurrency space. He combines Ichimoku cloud with fractals and high-volume support and resistance levels (a simplified version of trading ranges).
Below his webinar on Ichimoku High Probability Trading where he explains how one can decide on an entry. If you have mastered the basics and are looking to learn some more in the way of craftsmanship, I highly recommend him.
In the video below his decision process consists of first looking at the cloud setup and waiting for a price/oscillator divergence which only establishes the direction of the potential position and a level for the entry. When that’s done one ought to look for a price signal (bounce, rejection, indecision) and finally entering the trade when a trigger appears (violation of the signal - so for instance a high volume move after a period of indecision).
CarpeNoctom (Josh Olszewicz)
#BubbleMoku is the author of the above mentioned Youtube channel, and also DrWD on Reddit, as mentioned below.
Busy chart that says we're going up, so long as we don't break 600.— #BubbleMoku (@CarpeNoctom) 29 June 2016
trgt = 840-940 BFX pic.twitter.com/j5pzJjXORI
He made a video on how he trades Ichimoku cloud.
Redditors who post about Ichimoku cloud
DrWD (Josh Olszewicz) is probably the only consistent Ichimoku advocate in the cryptocurrency space on Reddit these days. He posts in the stickied threads on /r/BitcoinMarkets. Bookmark his profile page
SFFWMorin posted an Ichimoku cloud tutorial on the subreddit /r/StockMarkets.
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About the author
Written by tradingfanbois
JMT under the Twitter handle @tradingfanbois has been deep in bitcoin markets since late 2014. It is the person who takes care of our office. Also answering your Quora questions regarding Bitcoin, cryptocurrencies and technical analysis.
Opinions are author's own.