Understanding the Kumo Formation in the Ichimoku Kinko Hyo

What is Kumo?

The Kumo, which means "cloud" in Japanese, is a shaded area on the Ichimoku Kinko Hyo chart. It is formed by two main lines: Senkou Span A and Senkou Span B. These two lines create a dynamic support and resistance zone that extends into the future, offering traders a valuable perspective on future price levels.

Senkou Span A calculation

Senkou Span A, also known as Leading Span A, is calculated by taking the average of Tenkan-sen (conversion line) and Kijun-sen (base line), then projecting this value 26 periods into the future. Here's the formula:

Senkou Span A=(Tenkan-sen+Kijun-sen)2\text{Senkou Span A} = \frac{(\text{Tenkan-sen} + \text{Kijun-sen})}{2}Senkou Span A=2(Tenkan-sen+Kijun-sen)​

Calculation example :

1. Calculate the Tenkan-sen by taking the average of the highest and lowest values over the last 9 periods.
2. Calculate the Kijun-sen by taking the average of the highest and lowest values over the last 26 periods.
3. Add the Tenkan-sen and Kijun-sen values, then divide by 2.
4. Project this value 26 periods into the future.

Senkou Span B calculation

Senkou Span B, or Leading Span B, is calculated by taking the average high and low over the last 52 periods, then projecting this value 26 periods into the future. Here's the formula:

Senkou Span B=(Highest over 52 peˊriodes+Lowest over 52 peˊriodes)2\text{Senkou Span B} = \frac{(\text{Highest over 52 periods} + \text{Lowest over 52 periods})}{2}Senkou Span B=2(Higher on 52 peˊriodes+Lower on 52 peˊriodes)​

Calculation example :

1. Identify the 52-period high and low.
2. Add these two values, then divide by 2.
3. Project this value 26 periods into the future.

Kumo interpretation

The Kumo is a visual representation of support and resistance levels. Here are some key points for interpreting the Kumo:

• Price above Kumo: When the price is above the Kumo, the trend is considered bullish. The Kumo then acts as a dynamic support.
• Price below Kumo: When the price is below the Kumo, the trend is considered bearish. The Kumo then serves as dynamic resistance.
• Prices inside Kumo : When the price is inside the Kumo, the market is in a consolidation or indecision phase. Support and resistance levels are less clear.
• Kumo thickness : A thick Kumo indicates a strong support or resistance zone, while a thin Kumo indicates a weaker support or resistance zone.

Practical example

Let's take an example to illustrate the use of Kumo. Suppose you analyze the chart of the EUR/USD. You observe that the price is above the Kumo, with Senkou Span A and Senkou Span B projected 26 periods into the future. This indicates an uptrend, and you might consider opening a long position using the Kumo as a support level.

Conclusion

The Kumo of the Ichimoku Kinko Hyo is a powerful tool for identifying trends and support/resistance levels. By understanding how Senkou Span A and Senkou Span B are calculated and interpreted, you can use Kumo to improve your trading decisions. Remember to practice with demo accounts and refine your understanding of this indicator before applying it in real trading situations.

We hope this article has helped you to better understand the formation of Kumo. If you have any questions or would like to share your experiences, don't hesitate to join us on social networks with the hashtag #xenesy and identifying @xenesy_project. Happy trading!