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 A and 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".

Figure III - The Kumo and its Calculations

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.