Ichimoku is a complete trading system. Understanding ichimoku will reduce a lot of work a trader generally does. One glance of charts with ichimoku will tell you what the instrument is doing and going to do in short to long term. So it is advisable for all budding traders to understand this one powerful tool and strengthen your trading skills.
To understand Ichimoku, we will need to understand its components in-depth. In this post we will learn about Kumo. Kumo is a Japanese word for cloud. Kumo is formed with the help of 2 components, namely Senkou Span A & Senkou Span B.
Formula to calculate Kumo
Kumo comes into existence with the help of 2 lines, namely Senkou Span A & Senkou Span B. Let us calculate both the components separately and then we will get Kumo.
Senkou Span A = (Tenkan-sen + kijun-sen)/2 (plotted 26 period ahead of the current time)
Senkou Span B = (52 period high + 52 period low)/2 (plotted 26 period ahead of the current time)
The space between both is shaded. When Senkou Span is above Senkou Span B, generally it is shaded green and red when Senkou Span B is above Senkou Span A.
The plotting of Senkou Span A is shown in the above chart
The plotting of Senkou Span B is shown in the above chart
The above chart shows Senkou Span A and Senkou Span B together
What does the Kumo tell us:
- A flattish Kumo acts as a strong resistance and support
- A trending Kumo is called Kumo in flux and can be easily passed through
- Price above Kumo means the instrument is bullish
- Price below Kumo means the instrument is bearish
Look at the chart below for visual confirmation
Role of Kumo in Ichimoku trading system:
- The future direction of the instrument can be known looking at the future kumo
- One glance can tell us what has happened in past, what is the current situation and what can be the probable future
- Shape of Senkou Span A and Senkou Span B can give us an idea about how price may react. A flattish mean consolidation, C Clamp shape will prove to be top or bottom. Upward looking means bullish and downward looking means bearish
- Price inside kumo can be said to be passing through turbulence and will break above or break down
Strategies possible with Kumo:
- Kumo breakout
- Kumo twist