One of the Most Popular Trading Indicators: Cloud Kumo

There are many trading indicators that are adopted by experienced investors when trading binary options and one of the most popular is the Ichimoku Kinko Hyo. As you may expect from its name, this is one of the Japanese forms of technical analysis and is characterised by the cloud, of the “kumo” as it is called in Japanese. The cloud is formed by two indicators, the Senkou A and B, which are project into the future by 26 periods. Everything between the two lines of these indicators represent the cloud.

How to Interpret the Cloud

The cloud can be interpreted as showing potential areas of support and resistance that have been projected forward. The higher the timeframe, the stronger the area of support or resistance. Therefore, when the price comes from the upside to touch the cloud on both the Senkou A and B lines, a trader should purchase call options, whereas they should place out options if the price touches the cloud coming from the downside with the cloud representing resistance at that point.

The Ichimoku Cloud Represents a Simple Trading Approach

The Ichimoku cloud indicator is well known all over the world for the simple and new approach to trading that it brings, acting as both a potential oscillator and a trend indicator.
The kumo, or cloud, is the most essential part of this indicator with two different colours of red and green. A red cloud is a signal of bearish market conditions in which case a put option should be executed, while a green cloud is a signal of bullish market conditions, in which case an investor should take call options.
As the cloud is projected ahead of the current prices for 26 periods, it shows the trader that the moment the cloud changes colour, they should take care when continuing with the prior trend. They should wait for the blue line (or Kinjun) and the red line (the Tenkan) to cross as if this takes place below the cloud, it represents a bullish signal, whereas if it takes place above the cloud, it represents a bearish one. This confirm the turning of the price and the start of a new trend. One way of trading binary options using the cloud indicator is to also use an additional oscillator such as the RSI which will offer confirmation of divergence to the investor.
If the price turns and touches the cloud while the market forms a divergence on the RSI, a trader should try to choose a bottom if the prior trend was bearish, or choose a top if the prior trend was bullish and they should execute a call and a put option before the Kinjun and Tenkan lines have a chance to cross. The investor should closely correlate the expiry date with the pattern’s time frame.

How to Exploit the Kinjun/Tenkan Cross

If an investor rides a trend, they should always ensure that in a bullish trend, the Tenkan is always found on top of the Kinjun and below it in the case of a bearish trend. Either the selling the spike or buying the dip strategy will work well every time the price retraces into the Kinjun line.
The clous is also a classic level of resistance and support and it also acts as a dynamic resistance and support. The trader will also know this some time in advance, thanks to the projection of 26 periods. For example, if the timeframe is on the monthly chart, the 26 periods will represent 26 months, and this gives the trader an idea from the current level where their asset’s price may hesistate in the period ahead. As dynamic resistance and support is more important than classic resistance and support, this makes the Cloud a unique indicator that is vital for traders to master if they wish to maximise their success.
The cloud gives a trader the possibility of trading put of call options eboth when it is tested on its bottom or top for the first time, or on its lower or upper part for the second time. An investor can trade this range by measuring the length between the cloud’s upper side and its lower side, (i.e. between the Senkou A and B) and then divide this range into an equal number of parts as the number of options intended to trade. An expiry date should be correlated to the timeframe of the pattern.

Other educational articles

• What is the Zig Zag Indicator in Binary Options Trading?
• What is the Trend Following Binary Options Trading Strategy?
• Use the Straddle Strategy for a Possible Put and Call Double-Win
• How to Use a Risk Reversal Strategy to Avoid a Large Part of Your Risk While Trading Binary Options
• What is the Pinocchio Binary Options Trading Strategy?

Recommended readings

• Short-term foreign exchange rate trading based on the support/resistance level of Ichimoku Kinkohyo. In Information Science, Electronics and Electrical Engineering (ISEEE), 2014 International Conference on (Vol. 1, pp. 337-340). IEEE, Deng, S. and Sakurai, A., 2014, April.
• “Other Indicators Superimposed on the Price.” In Basic Technical Analysis of Financial Markets, pp. 111-117. Springer Milan, 2013, Di Lorenzo, Renato.