Crypto-Trading with Ichimoku Cloud...And The World of Virtual Trading Assistants

Crypto enthusiasts often face a conundrum when turning to cryptocurrency as a viable investment. An eternal question remains: To invest and forget, or to trade the notorious price swings for even more gains?

Academic research shows a simple buy-and-hold strategy for Bitcoin the past six years would have yielded 1690% for investors. However, utilizing a long-short trading approach would have seen gains of over 2,500% at a minimum, or even 5,000% using a well-tweaked strategy.

Needless to say, it’s easy to be allured by the prospect of trading cryptocurrencies with those statistics in mind.

But as easy as it may look, trading is not for the faint-hearted, with even seasoned investors succumbing to sudden market movements and price drops — look no further than the “Black Thursday” event in March this year which caused two very popular crypto funds, Cryptolab Capital and Adamant Capital, to fold overnight with their millions of dollars falling victim to the market.

This is where a strategy becomes important. One could either take a fundamental approach towards the crypto market — looking at macro factors, correlations with the US equity indices, or Bitcoin miner-led market movements — or choose a technical strategy, meaning indicators and chart-reading to calculate probabilities of a market movement and place trades accordingly.

A popular indicator is the Ichimoku Kinko Hyo, a so-called all-in-one trading system that was developed in the 1940s by Goichi Hosoda, a Japanese journalist. Its name translates to “equilibrium at a glance,” and allows traders to trade breakouts, identify support and resistance levels, and generally assess the group think behavior of the markets.

“The Ichimoku Cloud has always been a comprehensive framework: it allows trend analysis, tells the trader when to stay out of the market completely, and provides clear signals with a high probability of success.” states Chairman Zen of MachinaTrader. “This combination allows the trader to act dispassionately and mechanistically in the market. And this also means that Ichimoku Cloud is ideal for creating an automated strategy."

Here’s what the Ichimoku Kinko Hyo, or colloquially, the Ichimoku Cloud looks like:

Daunted? Don’t be. The tool is easy to read and determine once each individual component is singled out.

First, is the “Kumo” - the cloud: the big green and red zones in the chart, below, where price always seems to go and either establish a new trend or get rejected. Markets are usually directionless and sideways when trading in the Cloud, meaning traders usually sit out and avoid placing trades while price is inside the Cloud.

The cloud is simply a calculation of the support and resistance equilibriums using previous price action of the past “x” periods. Generally, the longer the period “x” is, the less probability of a “false” signal (although absolutely nothing is absolutely certain in markets).

Playing the Cloud is easy. Traders can go “long,” or bet on rising prices when price breaks above the Cloud, and “short,” or bet on decline if price breaks below the cloud. A green Cloud is a “support” area, one where the price is expected to see buying and subsequently continue an upward trend. Vice-versa for when the Cloud is red.

In addition, the thicker the Cloud, the stronger its support/resistance. A thin Cloud is an indication that the market is unlikely to see much support/resistance when price approaches the Cloud. Hence, the thickness of the Cloud is an important consideration when trading the “Kumo”.

Next is the Tenkan sen, or the “conversion line” as singled out (blue) in the chart below:

The Tenkan sen calculates the average of the highest high and lowest low during the last “x” number of candles. Some traders feel that the Tenkan sen provides better points of support/resistance than a simple moving average. 

Here is a 21-period Tenkan sen and a 21-period simple moving average for comparison:

Notice that when the Tenkan sen is flat, it indicates a trendless condition in the market during the last 21 candles. While an angled Tenkan sen shows the direction and relative momentum of price action during the last 21 candles. 

A moving average doesn’t respond in this manner, making the Tenkan sen a line that acts as both support/resistance and a directional indicator.

Third, is the Kijun sen or the “base” line, which, similar to the Tenkan sen, is calculated from the highest high and lowest low averaged over the previous “x” number of candles. Why a duplicate? Because this component is calculated over a longer period than the Tenkan sen, thereby providing a second “slower” Tenkan sen for comparison, as well as, a longer timeframe indicator of support/resistance.

A possible strategy — used by some traders — is to consider the Tenkan sen and Kijun sen in a similar manner as the popular “moving average crossover”. Trade long when the faster Tenkan sen crosses above the slower Kijun sen (indicating an uptrend) and trade short when the crossover occurs to the downside.

Lastly, the Chikou span, or the “lagging” line. This one calculates the current price and shifts that back by “x” number of candles. The main signal given is “trend confirmation”. Once the Chikou span moves from above to below (or below to above) the Ichimoku Cloud it signals trend direction.

 In the chart, above, the lagging line breaks above the Kumo, providing a strong buy signal for traders. The move is said to be a “bullish” Kumo breakout, while the opposite of this - the Chikou breaking below the Cloud - is usually a “bearish” signal where traders might sell and offload positions.

With these four components explained, the Ichimoku Cloud should now be more easy to understand and read. And here is why it is considered to be a “single, integrated strategy”: One glance at the chart provides the trader with an indication of trend (or lack thereof), support and resistance, potential breakouts, and similar past “setups”, making this freely available indicator a Swiss Army knife in any trader’s toolbox.

Automate the Cloud?

Ichimoku Cloud trading signals don’t necessarily require manual execution. Services like MachinaTrader, an online trading platform that allows traders to automate their strategies. A trader can code the logic of their strategy via the dashboard, or pick from already-coded algorithms (including Ichimoku Cloud), backtest its efficiency before deploying it live in the market.

Traders can activate a terminal on the MachinaTrader dashboard and code their own complex trading strategies, define backtesting parameters, and much more. Traders can monetize successful strategies by making them available to other platform users. In addition, it allows you to choose to have a machine learning bot oversee select strategies. Bob, the trading robot can recommend improvements, leading to a more profitable trading strategy with suggestions of optimal parameters, for various market conditions, for indicators like the Ichimoku Cloud.

The future of finance is here indeed.