The Degen's Guide to Trading an Ichimoku Cloud

Go from zero to hero, never get rekt again, make money beyond your wildest dreams, be popular with women. Everything is possible with this simple strategy market makers hate...

What is an Ichimoku Chart?

The Ichimoku Kinko Hyo (to give it its full name) is used to identify high probability trades. Originally used to devastating efficacy by Asian trading desks in the derivatives and equities markets, this technique has recently become more popular with Western traders due to the edge it provides over other typical strategies.

This over-performance is primarily due to the fact that it provides more data points than strategies such as MA crossovers, or simple price action trading.

More data = more reliable price action AND more potential setups.

The cloud effectively integrates three indicators into a single chart. It’s as if God combined Kate Upton, Margot Robbie and Jessa Rhodes into a Single Unicorn and painted her over your chart.

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                                           Now that’s sorted, let’s get on with it.

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How to read an Ichimoku Chart

The first time you look at an Ichi cloud you might think that someone’s child has run amok with the crayons. However, once each element is explained, reading it becomes trivial.

N.B: As our context is trading crypto, all parameters described below are modified from the original legacy ones to suit a 24/7/365 market that’s engineered to wick you to poverty and mental breakdown.

One of the most common comments on my Twitter posts is that my cloud looks different. Here are the best Ichimoku settings for crypto:

The cloud consists of four primary elements. The first two we’ll look at are the Tenkan Sen and Kijun Sen (AKA TK Lines). These are utilised in a similar manner to moving averages, with crossovers providing signals to enter/exit trades. The one key difference to bear in mind is that unlike your garden variety moving averages, which are plotted off a series of closing prices, the TK lines use the average of the highest high and lowest low over a specific look back period.

1. Tenkan = (Highest High + Lowest Low) ÷ 2. This is calculated over 20 periods

2. Kijun = (Highest High + Lowest Low) ÷ 2. This is calculated over 60 periods

The TK signals are generated as the TK lines cross (just as they do with moving averages), with the Tenkan (blue line) crossing over the Kijun (red line) being a bullish signal, and vice versa for the Kijun crossing over the Tenkan.

Here’s an example with all other elements stripped out for clarity’s sake. You entered at 11.2K and exited at 56K having made +400%. Sick gains brah. Don’t forget to collect your clout from the rekt plebs on CT.

And to demonstrate that I’m not cherry-picking, here’s the last exit signal triggered on my favourite timeframe, the 12H. You exited at 59.7K and reentered 37% lower, chilling in stables whilst everyone around you got drawn down back to the poverty line. Do that three times and you’ve compounded your stack by 257%, as well as saved a fortune on heartburn meds.

Now, let’s get to the good stuff. The actual “Ichimoku Cloud”. This is unique in TA, as it is both backwards AND forward looking. Its’ spans or edges represent support and resistance areas, with a No Trade Zone (the cloud body, AKA the Kumo or cloud) in between them .

Here is how these spans are calculated:

3. Cloud (or Senkou) Span A = (Tenkan + Kijun)/2. This is then plotted 30 periods into the future

4. Cloud (or Senkou) Span B = (Highest High + Lowest Low)/2. This is then plotted 30 periods into the future

If the Kumo is coloured red, Span B is above Span A and Bulls are fucked. If it’s green, Span A is above Span B and you can go back to speccing your G800.

The cloud prints a nice thicc Support/Resistance buffer, with a width that adapts to the volatility in the market. This is because a break above the cloud is a long signal and vice versa for a close below. Therefore, the cloud will grow thicker in a volatile market to protect you from fake-outs, and narrows in ranging PA to get you in as soon as range high is broken.

Here’s a couple of examples of how the Cloud protects your stack. In the below example you would have closed your long, but wouldn’t have gone short, as price and TK lines remained above the cloud. You would have then re-entered on the recross.

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And here, you would have held out for a close above the cloud and bought 9% more BTC for your money. Gains apart, 9% better entries on their own will double your stack in 8 trades.

Time to break out the red suspenders and cigars dude, Gekko’s got nothing on you.

The final piece of the Ichimoku Chart is the Lagging or Chikou Span. This is simply current price plotted 30 periods back. The purpose of the Lagging span is to highlight the current trend and its momentum.

If the Lagging span is below price, then bears are in control, and vice versa when it’s above price. When the lagging span crosses price from above, it tells us that bulls are losing steam, and vice versa when it crosses from below.

Now that we’ve explained all the elements, here’s a handy legend you can reference in case you need a refresher.

Pro tip: Women fucking LOVE it when you explain the cloud’s composition. Be sure to use the Japanese names, and do this on the first date so she knows exactly what she’s dealing with. The more detail the better.

How to trade the Ichimoku Cloud

The first step (should) always be analysing where the market is, you do this by running through this checklist:

Ichimoku Checklist (in order of importance): 

• Where is the price relative to the cloud?

• Is the future cloud bullish or bearish?

• How are the TK lines crossed?

• Where is the Lagging span relative to price and cloud

Once that’s done you should have a pretty decent idea of where the market is, and which direction it’s going. The next step is to wait for a signal. Patience is key here, because we’re traders, not gamblers, and therefore only take confirmed setups on the 12H or higher.

Signals:

 TK Cross 

• TK cross is when Tenkan line crosses Kijun

• When Tenkan Crosses Kijun from below = Bullish

• When Tenkan crosses Kijun from above = Bearish

• Bullish TK cross above cloud = Bullish continuation signal

• Bearish TK cross below cloud = Bearish continuation signal

• Bullish TK cross below cloud = Short exit signal

• Bearish TK cross above cloud = Long exit signal

 Kumo Breakout 

• Price breaking through top of cloud = bullish. Bottom = Bearish

• Price break + TK Cross = double strong signal. You ALWAYS take this trade

• Price within cloud = no trade zone except for edge-to-edge trades

 Kumo edge to edge 

• When price breaks into cloud, with candle closes inside it. Target is opposite edge of cloud, especially when the cloud’s edge is flat

• Triggers with candle close inside cloud

• Target is other edge of cloud

• Thicker clouds = better risk vs reward

• Ideally TK cross matches direction of trade 

 Kijun Bounce 

• This is when the price retraces to the Kijun line and bounces off it - Confirming it as a support level (bullish signal)

  • Most likely happens when there’s a large gap between the TK lines

• Placing bids at the Kijun is buying the support level

• After a bounce, the trend is likely to continue

• The longer the Kijun support holds, the stronger it is.

• The more candles close under it, the more likely that the support is failing

 Kijun Cross 

• Just like the TK cross, but with price. When price crosses Kijun from below = bullish and above to below = bearish

 Kumo Twists 

• This is when the green and red cloud lines cross

• Future cloud is green = Bullish / Red = Bearish

• Means there is no S/R or direction in the market

• Price tends to cross through the twist

 Lagging Span 

• Above cloud + price = bullish and vice versa when it’s below

• When this enters price it signals that things are about to go sideways

C-Clamp / TK disequilibrium 

• The greater the distance between Tenkan and Kijun the more overbought/sold

• Big gaps = Decent chance of a mean reversion move

• Tenkan above = overbought Kijun above = oversold

• When overbought, best is not to short, but to place bids at kijun line

Best Ichimoku Trade Setups

There you have it, setups for days. But which are the the absolute OG ones? There are four killer setups that I take 100% of the time.

1. Weekly kumo breakout. This happens once every few years and has never failed me.

2. Kumo breakout with bullish TK cross on daily

3. Edge to Edge on Daily (lower hit rate than the others, but you generally get a second chance to get out at breakeven should the trade go against you)

4. Exit longs on bearish TK cross above cloud (because knowing when to exit is as important than when to enter)

Tl;Dr

• Price above cloud + Bullish TK cross = Up Only incoming

• TK cross = Entry or exit signal

• Price in cloud = No trade zone unless taking an E2E trade

• Price under cloud = Walk away

Wrapping up

There you have it, I hope you enjoyed reading that and found it somewhat educational. At the very least I hope that it’ll help orient yourself in the market, at best I hope this proves to be your key to financial freedom.

This took quite a bit of time and effort to put together, so spreading the word would be much appreciated.

Best of luck

TCP