The term Ichimoku originated from the Japanese phrase Ichimoku Kinko Hyo that means one glance equilibrium chart.
At first glance, the Ichimoku Cloud seems like a complicated trading system to use for binary options trading. Admittedly, advanced traders are better suited to use this system but it is one of the most effective indicators for identifying price trends, support and resistance levels, trade signals, and the direction of price movements.
Characteristics of the Ichimoku Cloud
What really distinguishes the Ichimoku Cloud from all other indicators is its five lines, each of which represents a specific price action. The space between two of these distinctive lines is shaded, giving the impression of a cloud, which is what most traders monitor for price action information.
1. The cloud is made up a red line, also known as the conversion line or the Tenkan-Sen.
2. The second line is white in color. It is known as the base lie or the Kijun-sen.
3. The third line, also known as the leading span or the Senkou span, is yellow in color.
4. The fourth line is blue in color and is known as a Senkou Span B or the leading span B.
5. The fifth lie is known as the lagging span or the Chickou span, which is green in color. This last line always trails the price movement.
Using the Ichimoku Cloud In Binary Options Trading
The most common application of the Ichimoku indicator is identifying support and resistance levels. The cloud spreads out by 26 price bars to indicate potential support and resistance levels. When price movements are on an uptrend and experiencing a pull back, the price will go off tangent from the cloud prior to resuming the upward movement. Similarly, in a downward price movement, the price will go back over to the cloud and then resume with the downtrend.
Other than identifying support and resistance levels, the cloud can also be utilized to confirm price trends. As such, in an upward trend, the price is usually above the cloud and then goes below the cloud in a downward trend. This indictor is especially helpful in identifying how strong or weak a price trend is. When the yellow line (third line) moves up and away from the blue line (fourth line), it is an indication of a strong upward movement. On the contrary, a strong downward movement is imminent when the yellow line moves down and away from the blue line. While all this is happening, the cloud will thicken as an indication of a strong trend while a weak trend will result into a faint cloud.
The base line can be used to determine when to enter or exit a market. For example, when the price falls below the base line while the movement is on upward trend, it would be best to buy when the price goes back above the base line. Meanwhile, if the underlying asset is on a downward trend and the price movement is above the baseline, the best move would be to sell as soon as the price falls below the base line.
While the Ichimoku Cloud is an easy to read indicator, it has several limitations. For starters, the cloud is unable to provide signals for extended trends; it only gives information on the periods of time that a trader is analyzing thereby increasing the potential for inaccurate signals. Another significant problem with this trading signal is that it is based on historical data. This further increases inaccuracies with the trading signals.
All in all, this trading system can be valuable in identifying market trends, momentum and identifying suitable entry points.