Ichimoku Clouds are essentially the shaded areas between various trend lines. Indeed, Ichimoku Clouds consist of the following trend lines:
The Conversion Line (or Tenkan-Sen): This is typically the midpoint (ie. average) of a 9-period High-Price and a 9-period Low-Price. The period can be days, weeks or even months.
The Baseline (or Kijun-Sen): This is typically the midpoint of a 26-period High-Price and a 26-period Low-Price.
The Leading (Senkou) Span A: This is the midpoint between the Conversion and Base lines. It is also plotted 26 periods ahead of the current period.
The Leading (Senkou) Span B: This is the midpoint between the 52-period High and the 52-period Low. Like the Senkou Span A, it is plotted 26 periods into the future.
The space between Span A and Span B is a shaded area known as the Kumo Cloud. It is red when Span A is below Span B. It turns green when Span A rises above Span B.
The Lagging (Chikou) Span is the Closing Price, plotted over the previous 26 periods.
Traders can use the Kumo Cloud to gauge market momentum. Momentum is strong (weak) when the stock is trading above (below) the Kumo Cloud. Furthermore, when Span A crosses above (below) Span B, this is regarded as a sign on strengthening (weakening) price momentum. Traders can also use Ichimoku Clouds to predict future levels of support and resistance, since Span A and Span B are plotted 26 periods into the future. The upper Span could represent future resistance levels. The lower Span could represent future support levels. Furthermore, Ichimoku Clouds can be used to generate buy or sell signals. Many traders tend to go long when the Conversion Line crosses the Base-Line, or when the share price crosses above the Base Line. They exit their position when the price crosses below the Base-Line or when the Conversion Line crosses below the Base-Line.
Parameters:
Conversion Line Period - How many periods to use when plotting the Conversion Line (eg. if you select 10, the Conversion Line will plot the average of the 10-period High-Price and a 10-period Low-Price).
Base Line Period - How many periods to use when plotting the Base Line (eg. if you select 27, the Conversion Line will plot the average of the 27-period High-Price and the 27-period Low-Price).
Leading Span B - How many periods to use when plotting Span B (eg. if you select 53, Span B will plot the midpoint between the 53-period High and the 53-period Low).
Lagging Span - How many periods to lookback when plotting the Lagging Span (eg. if you select 27, the Lagging Span will be plotted over the previous 27 periods).