Ichimoku Cloud
A comprehensive indicator showing support, resistance, trend, and momentum at a glance.
The Ichimoku Cloud (Ichimoku Kinko Hyo) is a Japanese charting system that displays support, resistance, trend direction, and momentum in a single view. It consists of five lines — Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B, and Chikou Span — and a shaded "cloud" (kumo) formed between Senkou Span A and B. The cloud is projected 26 periods into the future, giving traders a forward-looking picture of where support and resistance may appear.
Why It Matters
Most indicators show you one thing. Ichimoku shows you everything at once: Is the trend up or down? Where is support? Where is resistance? Is momentum confirming the move? For options traders, this comprehensive view speeds up analysis. Instead of layering five different indicators on a chart, you get a single system that answers the key questions needed to select a strategy and direction.
The cloud itself acts as a dynamic support and resistance zone. Thick clouds represent strong barriers that price is unlikely to break through easily. Thin clouds are weak and prone to breakouts. This directly informs options strategy selection — sell premium near thick cloud boundaries, buy directional options when price breaks through a thin cloud.
How It Works
The five components:
- Tenkan-sen (Conversion Line): Midpoint of the highest high and lowest low over the last 9 periods. Acts as a fast signal line.
- Kijun-sen (Base Line): Midpoint of the highest high and lowest low over the last 26 periods. Acts as a slower signal line and dynamic support/resistance.
- Senkou Span A (Leading Span A): Average of Tenkan-sen and Kijun-sen, plotted 26 periods ahead. Forms one edge of the cloud.
- Senkou Span B (Leading Span B): Midpoint of the highest high and lowest low over the last 52 periods, plotted 26 periods ahead. Forms the other edge of the cloud.
- Chikou Span (Lagging Span): Current closing price plotted 26 periods in the past. Confirms trend by comparing current price to past price.
Key signals:
- Price above the cloud: Bullish trend. Favor calls and bullish spreads.
- Price below the cloud: Bearish trend. Favor puts and bearish spreads.
- Price inside the cloud: Indecision zone. Consider neutral strategies like iron condors.
- Tenkan-sen crosses above Kijun-sen: Bullish crossover, especially powerful when it occurs above the cloud.
- Cloud twist (Senkou Span A crosses Senkou Span B): Potential trend change ahead.
Quick Example
A stock trades above a thick green cloud with the Tenkan-sen above the Kijun-sen. This is a strong bullish setup across all Ichimoku signals. You buy a call spread with 30 days to expiration. The cloud below price at $140 provides a clear support level, so you know where the trend thesis breaks. The stock continues higher and your spread profits.