In this strategy, we will be using two Ichimoku Cloud moving averages.
First is the Tenkan-sen, but we will call this the Conversion line.
Second is the Kijun-sen or also known as the Baseline.
Tenkan-sen/Conversion line - Plotted as the highest high + lowest low/2, averaged over the last nine periods.
The Conversion Line is also known as the turning line. Conversion Line signals an area of minor support or resistance. It also moves much faster than the baseline and reacts to trend changes much quicker. Its slope shows the market trends, and when it moves sideways, it indicates a ranging market.
Formula: (9 period high + 9 period low)/2
Kijun-sen/Baseline - Plotted as the highest high + lowest low/2, averaged over the last 26 periods.
The Baseline moves much slower than the conversion line. The Baseline is also known as the confirmation level and serves as a signal for support and resistance. A lot of traders use the Baseline as a trailing stop level. This is what we will use as a stop loss.
Formula: (26 period high + 26 period low)/2
How to Read Ichimoku Moving Average Indicators
For many traders, the Ichimoku cloud system might seem complicated and hard to understand, but once you get familiar with how to interpret the charts, you will find a lot of great trading signals.
- Since the Conversion line only measures 9 candles, it is considered a short-term price movement. If the market price is above the Conversion Line, this suggests a short-term upward momentum. If the market price is below the Conversion Line, this suggests a short-term downward momentum.
- The Baseline represents medium-term price movement since it measures more candles than the Conversion line. If the market price is above the Baseline, this suggests a medium-term upward momentum. If the market price is below the Baseline, this suggests a medium-term downward momentum.