Applications of the indicators

To start with, the Kumo (or most people call it cloud) is getting more popular among chartists to identify support and resistance area. When price is trading above the Kumo, the prevailing trend is said to be up and the Kumo will be treated as the support area whilst if price is below the Kumo, the trend is said to be down and the cloud will become resistance area instead.

If the price is below the Kumo (cloud), the lower line (i.e. the Senkou Span A) acts as the first resistance level, and the upper line (i.e. Senkou Span B) becomes the second resistance level.

If the price is above the cloud, its upper line (i.e. the Senkou Span A) acts the first support level, and the lower line (i.e. the Senkou Span B) becomes the second support level.

One more thing is that the thickness of the Kumo (cloud) also indicates the market volatility. A thin layer of cloud implies the current volatility is low whilst a thick cloud implies increasing volatility.

The applications of the 2 lines - Tenkan-Sen and Kijun-Sen are quite similar to moving average studies, buy and sell signals are generated when short-term line (Tenkan-Sen) crossover the longer-term line (Kijun-Sen).

A buy signal is generated when the Tenkan-Sen crosses above the Kijun-Sen from below. On the other hand, a sell signal is generated when the Tenkan-Sen crosses below the Kijun-Sen from above. However, one clear advantage of using Ichimoku Kinko over the moving average crossover is that the area where the Tenkan-Sen crosses the Kijun-Sen will dictate the relative strength of that buy/sell signal.

If a buy signal (i.e. the Tenkan-Sen crosses above the Kijun-Sen from below) happens above the Kumo (or cloud), this would be considered as a very strong buy signal as the cloud is representing support / resistance area.

Similarly, if a sell signal (i.e. the Tenkan-Sen crosses below the Kijun-Sen from above) occurs below the cloud, this would be considered as a very strong sell signal. If the buy/sell signal occurs inside the Kumo (or cloud), this signal will be treated as normal.

Finally, if the buy signal happens below the cloud, it will be viewed as a weak signal whilst if the sell signal occurs above the cloud, it will be treated as a weak signal also.