One of the most popular trading indicators is the Ichimoku Kinko Hyo. Judging by the name of course one can tell that is is coming not from the Western branch of technical analysis but from the Japanese side.
The Ichimoku is famous for the cloud, or the kumo like the Japanese are saying. The cloud is actually being formed by two indicators that are projected 26 periods into the future. I am talking about the Senkou A and Senkou B. Everything that is between the two lines represents the cloud.
Interpreting the Ichimoku
The main interpretation of the cloud is the fact that it is showing potential support/resistance areas that are projected forward. Of course, the usual caveat applies: the higher the time frames, the stronger the support/resistance area.
Therefore, the thing is that traders should buy call options when price is coming from the upside and touches the cloud, both on the Senkou A and Senkou B lines, and put options when price is touching the cloud when it comes from the downside and the cloud represents resistance at that point.
Ichimoku Indicator – Simple Approach to Trading
Ichimoku indicator is famous throughout the world as it brings a new and simple approach to trading as it is acting both as a trending indicator as well as a potential oscillator.
As a matter of fact, on some trading platforms it is listed as a trend indicator while on others as an oscillator and this comes only to confirm the above statement.
The cloud or the Kumo is by far the most important part of the indicator and it is having two different colors: green and red. It is obvious that a red cloud signals bearish conditions and a put option should be looked for trading while a green cloud signals bullish conditions and therefore a call option should be searched for.
The fact that the cloud is projected 26 periods ahead of current prices is showing us that the moment the cloud turns the color we should be careful into continuing with the previous trend. The next thing to look for is to wait for the Kinjun (the blue line) and Tenkan (the red line) to cross as this cross is a bullish one if it happens below the cloud and a bearish one if it happens above the cloud.
That is the confirmation that price is turning and a new trend is starting.
One way to trade binary options with the cloud is to use an additional oscillator, like the RSI for example that should offer divergence confirmation to the regular trader.
Interpreting the Kumo
In other words, if price is turning and touches the cloud and market formed a divergence on the RSI as well, then might be a good idea to try to pick a bottom if the previous trend was bearish or a top if the trend was bullish and trade a call and a put option even before the Kinjun/Tenkan cross to happen. The expiration date should be closely correlated with the time frame the pattern is forming on as it is making no sense to trade a small expiration date if the time frame is bigger than 4h chart or a long expiration date is the time frame is the 5m or the 1m chart.
Exploiting the Tenkan/Kinjun Cross
When riding a trend then one should make sure the Tenkan is always on top of Kinjun in a bullish trend and below the Kinjun in a bearish trend and buying the dip or selling the spike strategy works like a charm each and every time price is retracing into the Kinjun line.
The cloud also acts as a classical support and resistance level as well as a dynamic support and resistance and a trader knows that in advance for quite some time as the 26 periods that are being projected represent 26 different candles.
If the time frame is the monthly chart for example then the 26 periods represent 26 months and we already have an idea from current levels were price should hesitate in the time ahead.
Dynamic support and resistance is always more important than the classical one and this feature makes the Ichimoku Cloud unique as an indicator that any trader should know how to master.
The cloud also offers the possibility to trade call or put options both when it is tested for the first time, on its top or bottom and when it is tested for the second time on the upper or lower part.
From this point of view it is offering a range and the way to trade is to measure the length between the upper side of the cloud and the lower one, basically between Senkou A and Senkou B and that range should be divided into as many parts as options intended to trade are. Choosing an expiration date here should be correlated as well with the time frame the indicator is applied.