The Ichimoku Cloud And Trading Strategy

The Ichimoku Cloud And Trading Strategy

By Ashish Garg

The Ichimoku cloud indicator is a technical indicator of Japanese origin and was a proprietary indicator with its Japanese formulator for around 30 years.

It involves calculating five lines of short to medium duration on the high, low and close of a security’s prices and plotting an area, between two of these five lines, better known as Ichimoku cloud.

These lines help in determining the direction, momentum and support-resistance levels for the time series data. The Ichimoku cloud indicator also generates buy and sell trading signals and is usually plotted along with candlestick to enable better decision making and clearer plots.

Calculations for the lines are simple and the time period chosen is somewhat arbitrary:

  1. Tenkan Sen or Conversion Line: (20-period-high + 20-period-low)/2
  2. Kijun Sen or Base Line: (60-period-high + 60-period-low)/2
  3. Senkou Sen A or Leading Span A: (Base Line + Conversion Line)/2
  4. Senkou Sen B or Leading Span B: (120-period-high + 120-period-low)/2
  5. Chikou Span or Lagging Span: (Close of 30 periods ago)

The Direction Of The Price Action

The Ichimoku cloud is formed between the Leading Span A and Leading Span B and helps in determining the strength and direction of the price action. For example, the direction or trend of the price action is up when the prices are above the Ichimoku cloud. Similarly, the direction of the price action is down when prices are below the Ichimoku cloud and the direction is flat when the prices are somewhere in the Ichimoku cloud.

The Strength Of The Price Action

The Strength can be estimated using the difference between the Leading Span A and B lines. When the Leading Span A is increasing and above the other span line, the increase in the difference signifies strength in the uptrend. It also means that the Ichimoku cloud is getting thicker. Similarly, the growth of the Leading span B over the other span line signifies strength in the downtrend and the thickness of the Ichimoku cloud increases again though in the opposite direction.

Python Code And Trading Strategy

The Python code below loads the OHLC data for a cryptocurrency named Bitcoin. It then calculates, plots the various components and the Ichimoku cloud using the pandas and matplotlib functionality.

## import packages
import pandas as pd
import matplotlib.pyplot as plt

# read the excel; set ‘date’ column as index; rename the columns;
#discard columns other than Date and OHLC
df=pd.read_excel('BTC.xlsx',index_col = 'Date',names = ['Open','High','Low','Close'], usecols = range(5))
df.sort_index(inplace=True) ## Sort in chronological order or as earlier dates first
df=df.loc['2016-10-01':'2018-9-30'] ##Select some data using pandas’ .loc indexing

# set values for the time periods to be used later
# becomes easier this way to change the time period values later to customise the calculations
CL_period = 20 # length of Tenkan Sen or Conversion Line
BL_period = 60 # length of Kijun Sen or Base Line
Lead_span_B_period = 120 # length of Senkou Sen B or Leading Span B
Lag_span_period = 30 # length of Chikou Span or Lagging Span

# add to the dataframe, different components of the Ichimoku
# use shift function to shift a time series forward by the given value
df['Conv_line'] = (df.High.shift(CL_period)+df.Low.shift(CL_period))/2
df['Base_line'] = (df.High.shift(BL_period)+df.Low.shift(BL_period))/2
df['Lead_span_A'] = (df['Conv_line'] + df['Base_line'])/2
df['Lead_span_B'] = (df.High.shift(Lead_span_B_period)+df.Low.shift(Lead_span_B_period))/2
df['Lagging_span'] = df.Close.shift(Lag_span_period)
df.dropna(inplace=True) # drop NA values from Dataframe

# plot the data using matplotlib's functionality
#add figure and axis objects
fig,ax = plt.subplots(1,1,sharex=True,figsize = (20,9)) #share x axis and set a figure size
ax.plot(df.index, df.Close,linewidth=4) # plot Close with index on x-axis with a line thickness of 4
ax.plot(df.index, df.Lead_span_A) # plot Lead Span A with index on the shared x-axis
ax.plot(df.index, df.Lead_span_B) # plot Lead Span B with index on the sahred x-axis

# use the fill_between call of ax object to specify where to fill the chosen color
# pay attention to the conditions specified in the fill_between call
ax.fill_between(df.index,df.Lead_span_A,df.Lead_span_B,where = df.Lead_span_A >= df.Lead_span_B, color = 'lightgreen')
ax.fill_between(df.index,df.Lead_span_A,df.Lead_span_B,where = df.Lead_span_A < df.Lead_span_B, color = 'lightcoral')

plt.legend(loc=0) #Let matplotlib choose best location for legend
plt.grid() # display the major grid
plt.show() # Finally display the plot

Ichimoku Cloud Plot

Conclusion

Ichimoku cloud is also known as Ichimoku Kinko Hyo. Ichimoku cloud is a technical indicator to gauge momentum, trend and strength of the price action using five lines and a cloud. The indicator has crossover points, just like MACD, to determine buy and sell signals.

Other classic momentum indicators can also be used in conjunction with the Ichimoku cloud to produce clearer buy and sell signals. We have successfully applied the Ichimoku Cloud combined with RSI to generate trading signals in our course on Cryptocurrency trading.

Disclaimer: All investments and trading in the stock market involve risk. Any decisions to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.