We are going to talk about the Kumo Cloud from the Ichimoku Kinko Hyo trading system. Yes, it may seem visually intimidating, but, it is growing in popularity. Why? You will find out, in the course of this informative guide into how you can use it to find support and resistance. Speaking of that, if you are a beginner, you need all the edge you can get, and that is why we have prepared forex broker reviews that show you the best forex broker in the world for you. Check them out.
There are several ways we use in the forex market to define support and resistance. One of them is the Kumo or Cloud tool. The tool is a component of the Ichimoku Kinko Hyo indicator. The Ichimoku indicator tends to make a lot of traders nervous because they do not understand it at first glance.
They assume that it is too confusing to be useful, and that is where they go wrong. However, the truth us that if you have a good understanding of the Kumo tool, you can do a lot with it. Usually, it is not necessary to employ all the 5 or 6 components of the Ichimoku Kinko Hyo at once.
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The Kumo can be used alone when you are trading currency pairs. One of the inherent properties of the tool is that it shows support resistance if you want it to.
A Bit of Background on the Ichimoku Trading System
Most of the platforms you get have the Ichimoku trading system. That is a sure sign that it is growing in popularity, and for a good reason. On the popular MT4 program, the Kumo Cloud is listed as an oscillator.
You will be able to use it to find support and resistance, and also see if the market is overbought or oversold.
As we mentioned earlier, the visuals on this system might be intimidating for a beginner. However, there is a treasure trove of material that explains how useful the tool can be and how each of the components interact to form the Ichimoku trading system.
Before getting into details and whatnot, let us summarize the system in a few short paragraphs. After that, we will learn how you can use Kumo Cloud to get the support and resistance areas of the market.
- Kumo Cloud– These are the areas where the Ichimoku trading system shows the support and resistance areas. They are derived from the previous pricing data. Here, the borders of a UP cloud are called Senkou Spans A and B. You will get alerts when the candlesticks exit the Kumo Cloud, other lines enter or pass the designated region or when the cloud’s color changes.
- Tenkan-sen and Kijun-sen– These lines work the same way that moving averages do. They are calculated from the previous lows and highs over the 9 and 26 periods. TheGreen line is called Tenkan- se and is the quicker of these two. Its intersections are instrumental trading signals, and the slope is the measurement of momentum.
- Chinkou-span– This line is the measurement of market sentiment and is based on the current closing prices, but moved backward 26 time periods. The position of the Chinkou-span relative to pricing data shows if buyers or sellers are dominating the action in the market. The cloud’s position may show resistance if it comes into play here.
Now that we have acquired that out of the way let’s get into the rest of this. Keep in mind, you are only as good as your broker. That is why we have the forex broker reviews section to let you choose the best forex broker in the world for you.
The Advantage You Get From Kumo Cloud’s Ichimoku Kinko Hyo Trading System
If you are a trader who is used to their favorite indicators, using the Ichimoku system with its integrated 4 or 5 indicators, working in tandem, might seem hard. Should you let go of what you know in favor of this new system?
Is it worth going through an entire learning-curve all over again?
Well, the answer to that question actually comes down to your personality as an individual. Are you willing to accept new ideas with ease, even when you have not tested them or gained confidence in how you can apply them?
Many traders chose the route that you may have guessed by now. They just use the Kumo Cloud in isolation, to detect the support resistance areas. It is a way of solidifying the interpretation that they make, concerning market behavior.
Trading with support resistance levels is a popular method that is preferred by many traders. That is why we are going to teach you how to do it so that you too, can benefit from what is offered by the Kumo Cloud oscillator.
How Kumo Cloud Finds Support and Resistance For Traders
Before getting into the specifics of how the Kumo Cloud works in finding the support and resistance levels, we should probably talk about the elements of support and resistance trading, as a method.
If you can learn these elements, the whole thing becomes easier to understand. So, let’s start with that.
- The Important Elements of Support and Resistance in Forex Trading
To understand the Kumo’s use in support and resistance indication, we need to start here with one of the elements that we call role reversal.
- In a role reversal, the switching of roles of the support and resistance points happens. The cause is a pullback or returns movement of the price action after it has broken through this crucial level. Therefore, a broken support level turns into a new resistance level, and a broken resistance level turns into a new support level.
- The second element is essential too. It is the fact that repeated testing of the critical area of support and resistance, which does not break these areas, usually makes them more durable. That tells you, more pressure from traders is needed, to break these areas.
As you will find out, the whole concept of support and resistance is much easier to get when it is visualized in a chart. Now that you know the crucial elements here, we can move on to the Kumo shapes that decide the support and resistance strength.
How Kumo Cloud Shows Support and Resistance Strength
The shape of the Kumo is what indicates to a trader, how strong the support and resistance will be. So, how do you use the shape of the Kumo to do that?
When you look at it, the Kumo is bound by two lines that we call Senkou Span lines A and B. They delineate the Kumo and make it easy for you to distinguish it from the rest of the Ichimoku indicator.
The Kumo can appear to be flat or bulky. You will have to check and see which shape it takes and if it is forming a top or bottom.
After you identify the tops and bottoms, you can use the trend line tool to draw on your performance. This way, you can trace a line across the Senkou Span A to Span B, for flat top and flat bottom respectively.
With the proper trace, a trader can detect instantly, where the price bounces off support or when the resistance rejects it. In this instance, the support and resistance are delineated by the borders of the Kumo Cloud.
With this action, you can know when the price goes into reversal mode. With that information, accurate entries with limit orders are easy to make.
What You Need To Note About the Kumo Cloud
Being able to realize when the price is going to bounce off support resistance is the reason why you need to have this one. With it, you can tell when it will break through the trendline and act in role reversal. These are the tenets that are used by traders who want to trade successfully.
You can use them too and be able to get the best support and resistance information for your use. We use the principle of the breakout here. For the price to be considered as having broken a support/resistance area, the price bar or candles must have closed beyond that specific area, usually, by the use of a time filter or price filter.
- When doing technical analysis, the time filter you use is a double candle close. That means the price has to close below support or above resistance with two successive candles before we can say that a breakout in price has happened.
- The second way to confirm when a price breakout has happened is the price filter. With this, the candle that closes above the resistance or below the support to reveal a breakout must close with a penetration of 3% in long term charts and 1% in short term charts.
You Wonder: What is 1% and 3% penetration, and how do we calculate them?
Let’s do that one. Let’s start with the 3% penetration math. The percentage references the extent to which the price moves beyond the support and resistance point. We express it as a percentage of the length of the candle.
Let’s say that a candle breaks the red support line closed at a price of 8073.50. The candle high could be at 8625.90. The whole candle moves from the high to the closing price, and the calculation is as follows:
8625.9 – 8073.5 = 552.4
So, we get the difference first. The support line is at 8289.98 in this case. The distance from the support line to the closing price is, therefore:
8289.98 – 8073.5= 216.48.
To get the penetration percentage, we do the calculation as follows:[216.48/552.4] X 100% = 39%
So, the penetration here is 39%, and that is more than the 3% needed to say that a price breakout has happened. With this, you will be able to know when to trade a bounce situation with the Kumo top/bottom or see a breakout or a role reversal situation.
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Essential Things To Remember About the Ichimoku System
- The Ichimoku cloud has five lines. Two of them compose a cloud where the difference is shaded, between the two.
- The lines show a nine-period average, 26-period average and an average of those two averages. In addition to that, they also have a 52-period average and a lagging line for the closing price.
- The cloud here is a crucial part of the indicator as a whole. When the price is below the cloud, we consider that a downtrend and when the price is above the cloud, we call that an uptrend.
- The trend signals we have mentioned are more reliable if the cloud moves in the same direction as the price. For instance, during an uptrend, the top of the cloud moves up, or the bottom of it moved down, during a downtrend.
It is all right there.
There are not many people who use the Kumo tool for support and resistance indication. It is understandable because many of them start with the most common kind. However, if you are fresh to this, you can learn the Kumo tool quickly and be able to use it for support resistance indication.
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Since Kumo/Cloud can stand on its own, it is not hard to master it just for a singular purpose. In comparison with the others, Kumo is relatively new, as Japanese traders developed it in the 60s. However, since it forms ‘one view’ using several factors, it became popular among those who learned it.
Several of the commentaries in Asian markets, make it a point to refer to the positioning of the Kumo Cloud, as it is the most dominant feature.