I've recently become fascinated by Ichimoku Kinko Hoy or "equilibrium-chart-at-a-glance-technique", clouds that detect support and resistance in trending markets. It is an extension of Japanese candlesticks. As I live in Japan, and I know the Japanese to be rigorous in the pursuit of perfection, I believe it when I hear that this indicator can result in a very high probability of success.
This is what I've found out about it:
It is a trend following indicator which reduces the number of false breakouts and keeps you in most of the move.
Constructing an Ichimoku Chart
(Source: Investopedia)
1. Tenkan-Sen, or conversion line:
(Highest high + lowest low) / 2, calculated over the past seven time periods.
2. Kijun-Sen, or base line:
(Highest high + lowest low) / 2, calculated over the past 22 time periods.
3. Chikou Span, or lagging span :
The most current closing price plotted 22 time periods behind (optional).
4. Senkou Span A:
(Tenkan-Sen + Kijun-Sen) / 2, plotted 26 time periods ahead.
5. Senkou Span B:
(Highest high + lowest low) / 2, calculated over the past 44 time periods. Plot 22 periods ahead.
1. Tenkan line is a sort of 7-period Ma
2. Kijun line is sort of 22-period MA
3. When Tenkan crosses Kijun from below, a buy signal is generated
4. When Tenkan crosses Kijun from above, a sell signal is generated
5. The area between Senkou Span A and Senkou Span B is referred to as "the cloud"
6.If the price is between these lines, or "in the cloud", the market is considered without a trend
7. The bounderies of the cloud act as support/resistance for prices above or below the cloud: if price is above the cloud, the upper line act as a first support, the second line as second support
8. If price is below the cloud, the two lines act as first and second resistance.
9. A bullish crossover ABOVE the cloud is a very strong buy signal, in the cloud is medium strength, and below the cloud is weak
10. A bearish crossover BELOW the cloud is a very strong sell signal, in the cloud - medium, above the cloud - weak
11. If the price remains above the cloud, the prevailing trend is up
15 If the price remains below the cloud, the prevailing trend is down
16. A breakout from the cloud in either direction is considered a strong trend reversal signal.