The most basic method of trading the Ichimoku cloud is with a simple crossover. However, with six different components comprising this technical indicator, stock traders must realize that “simple” is a relative term and more analysis will be required to discern the best trading set-ups.

For the Ichimoku crossover strategy, the red Kijun-sen, a simple moving average with a 26-candle lookback period, serves as the signal line and the blue Tenkan-sen (SMA-9) serves as the trigger:

•    When the Tenkan-sen crosses above the Kijun-sen, it’s a bullish indication and may signal a long entry.
•    When the Tenkan-sen crosses beneath the Kijun-sen, it’s a bearish indication and may signal a short sell.

The word “may” in the two sentences above is important as no signal is automatic with the Ichimoku. Each must be analysed within the context of the indicator’s other components, which provide a strength level for the crossover and confirmation or otherwise for the market entry.

The Kumo provides the strongest of these confirmations. The Kumo is the cloud itself, the meshed-in layer between the two Senkou span lines. It serves as a dynamic and major support-resistance level, fully capable of stopping a trending move before it begins, and therefore its location relative to the crossover is significant:

•    For long entries, strong confirmation comes when the Tenkan-sen crosses above the Kijun-sen while above the Kumo. This means that the price action won’t have to break through the Kumo’s resistance to continue its move higher.
•    If the crossover higher occurs while below the Kumo, the long entry signal is weaker, as the cloud’s strong resistance level is in the price action’s path.
•    Crossovers that occur within the Kumo carry a neutral bias.
•    For short entries, strong confirmation comes when the Tenkan-sen crosses beneath the Kijun-sen while beneath the Kumo, as the price action won’t have to breach that strong support level to continue its move lower.
•    If the crossover lower occurs while above the Kumo, the short entry signal is weaker, as the support level is in the way of the move.

Finally, there’s the Chikou span, which is the current candle’s closing price moved 26 candles into the past and displayed as a lime green line. It serves as the trend’s barometre and a sort of magnet which draws the price action converging toward itself, and therefore:

•    A long entry signal is stronger if it occurs beneath the Chikou span, and
•    A short entry signal is stronger if it occurs above the Chikou span.

The entry signal is complete with the significant candle’s close, e.g., the trade is placed on the first candle following the close of the candle where the crossover takes place.

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