The Basics
The kumo is the very "heart and soul" of the Ichimoku Kinko Hyo charting system. Perhaps the most immediately visible component of Ichimoku, the kumo ("cloud" in Japanese) enables one to immediately distinguish the prevailing "big picture" trend and price's relationship to that trend. The kumo is also one of the most unique aspects of Ichimoku Kinko Hyo as it provides a deep, multi-dimensional view of support and resistance as opposed to just a single, uni-dimensional level as provided by other charting systems. This more encompassing view better represents the way in which the market truly functions, where support and resistance is not merely a single point on a chart, but rather areas that expand and contract depending upon market dynamics.
The kumo itself is comprised of two lines, the senkou span A and the senkou span B. Each of these two lines provides its own measure of equilibrium and together they form the complete view of longer-term support and resistance. Between these two lines lies the kumo "cloud" itself, which is essentially a space of "no trend" where price equilibrium can make price action unpredictable and volatile.
Trading within the kumo is not a recommended practice, as its trendless nature creates a high degree of uncertainty.
A Better Measure of Support and Resistance
As mentioned earlier, one of the kumo's most unique aspects is its ability to provide a more reliable view of support and resistance than that provided by other charting systems. Rather than providing a single level for S&R, the kumo expands and contracts with historical price action to give a multi-dimensional view of support and resistance. At times the kumo's ability to forecast support and resistance is nothing short of eerie, as can be seen in the chart below (Figure I) for USD/CAD, where price respected the kumo boundaries on five separate occasions over a 30-day span.
The power of the kumo becomes even more evident when we compare traditional support and resistance theory to Ichimoku's more comprehensive view of support and resistance via the kumo.
In the chart for Figure II below, we have added a traditional down trendline (A) and a traditional resistance line at 1.1867 (B). Price managed to break and close above both the down trendline and the single resistance level at point C. Traditional S&R traders would take this as a strong signal to go Long this pair at that point. A savvy Ichimoku practitioner, on the other hand, would take one look at price's location just below the bottom edge of the kumo and would know that going long at that point is extremely risky given the strong resistance presented by the kumo. Indeed, price did bounce off of the kumo and dropped approximately 250 pips, which would have most likely eradicated the long position of the traditional S&R trader.
Frustrated by his last losing trade, the traditional S&R trader spots another chance to go long, as he sees price break and close above the prior swing high at point D. The Ichimoku trader only sees price trading in the middle of the kumo, which he knows is a trendless area that makes for uncertain conditions. The Ichimoku trader is also aware that the top boundary of the kumo, the senkou span B, is close at hand and may present considerable resistance, so he again leaves this dubious long trade to the traditional S&R trader as he awaits a better trade opportunity. Lo and behold, after meeting the kumo boundary and making a meager 50 pips, the pair drops like a stone nearly 500 pips.
The example given above illustrates how Ichimoku's multi-dimensional view of support and resistance gives the Ichimoku practitioner an "inside view" of S&R that traditional chartists do not have. This enables the Ichimoku practitioner to select only the most legitimate, high reward trade opportunities and reject those of dubious quality and reward. The traditional chartist is left to "hope" that their latest breakout trade doesn't turn into a head fake - a shaky strategy, at best.
Price's Relationship to the Kumo
In its most basic interpretation, when price is trading above the kumo, that is a bullish signal since it indicates current price is higher than the historical average. Likewise, if price is trading below the kumo, that indicates that bearish sentiment is stronger. If price is trading within the kumo, that indicates a loss of trend since the space between the kumo boundaries is the ultimate expression of equilibrium or stasis. The informed Ichimoku practitioner will normally first consult price's relationship to the kumo in order to get their initial view on a chart's sentiment. From a trading perspective, the Ichimoku chartist will also always wait for price to situate itself on the correct side of the kumo (above for long trades and below for short trades) on their chosen execution time frame before initiating any trades. If price is trading within the kumo, then they will wait to make any trades until it closes above/below the kumo.
Kumo Depth
As you will see upon studying an Ichimoku chart, the kumo's depth or thickness can vary drastically. The depth of the kumo is an indication of market volatility, with a thicker kumo indicating higher historical volatility and a thinner one indicating lower volatility. To understand this phenomenon, we need to keep in mind what the two lines that make up the kumo, the senkou span Aand the senkou span B, represent. The senkou span A measures the average of the tenkan sen and kijun sen, so its "period" is between 9 and 26 periods, since those are the two periods that the Tenkan Sen and Kijun Sen measure, respectively. The senkou span B line, on the other hand, measures the average of the highest high and lowest low price for the past 52 periods. Thus, the Senkou Span A is essentially the "faster" line of the two, since it measures a shorter period of equilibrium.
Consider the chart in Figure III below. For the previous 52 periods, price made a total range of 793 pips (from a high of 1.2672 to a low of 1.1879) The midpoint or average of this range is 1.2275 and that is thus the value of the senkou span B. This value is then time-shifted forwards by 26 periods so that it stays in front of current price action. The senkou span A is more reactive to short-term price action and thus is already reflecting the move of price back up from its low of 1.1879 in its positive angle and the gradually thinning kumo. The senkou span B, on the other hand, is actually continuing to move down as the highest high of the last 52 periods continues to lower as it follows the price curve's move down from the original high of 1.2672. If price continues to rise, the senkou span A and B will switch places and the senkou span A will cross above the senkou span B in a so-called "kumo twist".
The kumo expands and contracts based on market volatility. With greater volatility (i.e. where the price of a given currency pair changes direction dramatically over a short period of time), the faster senkou span A will travel along in relative uniformity with the price curve while the slower senkou span B will lag significantly given that it represents the average of the highest high and lowest low over the past 52 periods. Thicker kumos are thus created when volatility increases and thinner ones are created when volatility decreases.
Kumo depth or thickness is a function of price volatility
From a trading perspective, the thicker the kumo, the greater support/resistance it will provide. This information can be used by the Ichimoku practitioner to fine tune their risk management and trading strategy. For example, they may consider increasing their position size if their Long entry is just above a particularly thick kumo, as the chances of price breaking back below the kumo is significantly less than if the kumo were very thin. In addition, if they are already in a position and price is approaching a very well-developed kumo on another time frame, they may choose to either take profit at the kumo boundary or at least reduce their position size to account for the risk associated with the thicker kumo.
In general, the thicker and more well-developed a kumo is, the greater the support/resistance it will provide.
Kumo Sentiment
In addition to providing a view of sentiment vis-a-vis its relationship with price, the kumo itself also has its own "internal" sentiment or bias. This makes sense when we consider that the kumo is made up of essentially two moving averages, the senkou span A and the senkou span B. When the senkou span A is above the senkou span B, the sentiment is bullish since the faster moving average is trading above the slower. Conversely, when the senkou span B is above the senkou span A, the sentiment is bearish.
This concept of kumo sentiment can be seen in Figure IV below:
When the senkou span A and B switch places this indicates an overall trend change from this longer-term perspective. Ichimoku practitioners thus keep an eye on the leading kumo's sentiment for clues about both current trend as well as any upcoming trend changes. The "senkou span cross" is an actual trading strategy that utilizes this kumo twist as both an entry as well as a continuation or confirmation signal. More on this strategy is covered in our Ichimoku Trading Strategies section.
Flat Top/Bottom Kumos
The flat top or bottom that is often observed in the kumo is key to understanding one piece of the kumo's "equilibrium equation". Just like the "rubber band effect" that a flat kijun sen can exert on price, a flat senkou span B can act in the same way, attracting price that is in close proximity. The reason for this is simple: a flat senkou span B represents the midpoint of a trendless price situation over the prior 52 periods - price equilibrium. Since price always seeks to return to equilibrium, and the flat senkou span B is such a strong expression of this equilibrium, it becomes an equally strong attractor of price.
In a bullish trend, this flat senkou span B will result in a flat bottom kumo and in a bearish trend it will manifest as a flat top kumo. The Ichimoku practitioner can use this knowledge of the physics of the flat senkou span B in order to be more cautious about both their exits out of the kumo. For instance, when exiting a flat bottom (bullish) kumo from the bottom, rather than merely placing an entry order 10 pips below the senkou span B, savvy Ichimoku practitioners will look for another point around which to build their entry order to ensure they don't get caught in the flat bottom's "gravitational pull". This method minimizes the number of false breakouts experienced by the trader.
See the highlighted areas in the chart for Figure V below for an example of flat top and bottom kumos:
