What is being used to determine where that "cloud" is?
Good question. It is a little complicated.
There are 5 components to the cloud. The first one is Tenkan-Sen (i.e. Conversion Line). This line is constructed like a moving average. It looks back 9 days, but unlike a moving average you don’t average each day in the period.
You calculate the overall midpoint between the highest daily high and the lowest daily low in the period. This gives you the midpoint of the trading range across the last 9 days. Formula: (9 day high + 9 day low/2)).
The second line is Kijun-Sen (aka Base Line). This is calculated in the same way as the Conversion Line but has a look back period of 26 days. This was the original amount of Japanese trading days in 1 month. Formula: (26 day high +26 day low/2)). The Conversion Line is shorter than the Base Line so it turns more times than the Standard Line - these crossovers can be used much in the same as MA crossovers.
Senkou Span A (aka Leading Span A) is the midpoint between the Conversion Line and the Base Line. This forms one of the cloud boundaries. It is referred to as Leading because it’s plotted 26 days into the future and forms the “faster” cloud boundary. (Conversion Line + Base Line/2)).
Senkou Span B (aka Leading Span B) is the midpoint between the 52 day high and the 52 day low in price. Formula: (52 day high + 52 day low/2)). This is the equivalent of 2 trading months. This is also plotted 26 days into the future and forms the “slower” cloud boundary.
Please note that the spans are similar to 17 day (the midpoint of 9 and 26) and 52 day averages shifted forward. The Cloud is formed from a shorter term and a longer term average snaking around each other shifted ahead of price.
The final component is the Chikou Span (aka Lagging Span). This is simply the price close plotted 26 days in the past. Below is an example of how this looks:
Try buying in at over $800 and not selling the whole way down. That's how we pros hodl. 