Ichimoku Cloud also known as Ichimoku Kinko Hyo is a technical analysis indicator used to identify trends and potential buy/sell signals in the market. It consists of five lines that help traders identify support and resistance levels, as well as potential entry and exit points. These lines are the Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B, and Chikou Span.
On a daily chart, traders use the Ichimoku Cloud to identify potential trends in the market. If the price is above the cloud, it is considered a bullish signal, while if it is below the cloud, it is considered a bearish signal. Traders can also look for crossovers between the Tenkan-sen and Kijun-sen lines as potential buy/sell signals.
The Tenkan-sen and Kijun-sen are two lines that make up the "Kumo" or "cloud" in the Ichimoku Cloud chart. The Tenkan-sen is the shorter-term line, while the Kijun-sen is the longer-term line. Senkou Span A and Senkou Span B are two lines that form the cloud, with Senkou Span A calculated by adding the Tenkan-sen and Kijun-sen and dividing by two, and Senkou Span B calculated by taking the highest high and lowest low over the past 52 periods and dividing by two. The Chikou Span is simply the current price plotted 26 periods in the past.
Easy formulas to calculate the components of the Ichimoku Cloud
Tenkan-sen (Conversion Line): (9-period high + 9-period low)/2
Kijun-sen (Base Line): (26-period high + 26-period low)/2
Senkou Span A (Leading Span A): (Conversion Line + Base Line)/2, plotted 26 periods ahead
Senkou Span B (Leading Span B): (52-period high + 52-period low)/2, plotted 26 periods ahead
Chikou Span (Lagging Span): Close plotted 26 periods behind
These lines are used to identify potential trends and support/resistance levels. Traders look for crossovers between the Tenkan-sen and Kijun-sen as potential buy/sell signals. Additionally, the position of the price relative to the cloud can also provide clues about market sentiment. However, it's important to use the Ichimoku Cloud in conjunction with other technical analysis tools and consider other market factors when making trading decisions.
Example of Calculation : For Bank of Baroda
First, let's calculate the Conversion Line: Conversion Line (9-day high + 9-day low) / 2
For Bank of Baroda, let's assume the 9-day high is 90 and the 9-day low is 80. So, Conversion Line = (90 + 80) / 2 = 85
Next, let's calculate the Base Line: Base Line (26-day high + 26-day low) / 2
Assuming the 26-day high is 95 and the 26-day low is 75, Base Line = (95 + 75) / 2 = 85
Now, let's calculate the Leading Span A: Leading Span A (Conversion Line + Base Line) / 2
So, Leading Span A = (85 + 85) / 2 = 85
Next, let's calculate the Leading Span B: Leading Span B (52-day high + 52-day low) / 2
Assuming the 52-day high is 100 and the 52-day low is 70, Leading Span B = (100 + 70) / 2 = 85
Finally, let's calculate the lagging span: Lagging Span Close (current close price) plotted 26 days behind
Assuming today's closing price for Bank of Baroda is 92, Lagging Span Close = 92
So, the Ichimoku Cloud values for Bank of Baroda would be: Conversion Line = 85
Base Line = 85 Leading Span A = 85 Leading Span B = 85 Lagging Span Close = 92
When taking a position based on the Ichimoku Cloud, traders should consider other technical indicators and market factors, such as news and market sentiment. It is important to use the Ichimoku Cloud in conjunction with other technical analysis tools to confirm signals and identify potential opportunities.
