The Ichimoku Cloud is one of our favorite technical indicators. The cloud can be intimidating to traders who do not consider themselves “technical analysts” but it is actually one of the simplest trend indicators around. The cloud is a set of moving averages and is actually comprised of six different individually calculated components. There are many ways to use the cloud but one of the simplest applications is for day trade setups. To look for these setups we need a basic understanding of one of the components of the Ichimoku Cloud, the Kumo.
The shaded area of the cloud, known as the Kumo, is what we will use to determine the overall trend and its strength. Reading it is quite simple. Anything that is trading below the cloud is in bearish territory and anything that is trading above it is in bullish territory. If the slope of the cloud is negative while the market is below the cloud the signal is stronger. To set up a simple day trade a trader will simply look to play in the same direction the cloud is indication. In this case, with the market opening below the cloud a trader would look to get short.
With the CME E-mini S$P 500 futures closing at 2110.75 in the first 5 min bar of the day we would look to get short with binary options.
Possible Trade: Selling the US 500 > 2109.0 Daily Binary option for $60
Risk: $40 per 1 lot
Reward: $60 per 1 lot
This sets a trader up to be short all day and gives them a 1.5-1 reward to risk ratio. As you can see the market has already rallied against the trader but due to the limited risk nature of binary options a trader can hold this position without adding any risk. This strategy can be used for long or short setups and works best when the market moves through the cloud on the open. This shows momentum and strength behind the trend.
While many traders struggle with technical analysis the cloud is simple and easy to use. Any trader of any skill level can use opening breaks or intraday breaks of the cloud to set up trades. Traders can even use linger time frame charts to set up swing trades. The risk reward nature of binary options makes them an ideal instrument to use with the cloud.