Now for the interesting stuff: how profitable is each technical indication by itself? Do you want to know which is the best technical indicator in forex!
After all, forex traders don’t add technical indicators to their charts only to make them appear nicer. Traders are in the money-making industry!
If these indicators produce indications that do not transfer into a lucrative bottom line over time, they are simply not the right choice for you!
We decided to backtest each technical indicator separately for the past 5 years in order to provide you with a comparison of their usefulness.
Backtesting entails comparing the parameters of indicators to previous price behavior in the past.
The Parameters
In your future studies, you’ll learn more about this. Take a look at the parameters we utilized for our backtest for now and find out which is the best technical indicator in forex for you.
| INDICATOR | PARAMETERS | RULES |
|---|---|---|
| Bollinger Bands | (30,2,2) | Cover and go long when the daily closing price crosses below the lower band. Cover and go short when the daily closing price crosses above the upper band. |
| MACD | (12,26,9) | Cover and go long when MACD1 (fast) crosses above MACD2 (slow). Cover and go short when MACD1 crosses below MACD2. |
| Parabolic SAR | (.02,.02,.2) | Cover and go long when the daily closing price crosses above ParSAR. Cover and go short when the daily closing price crosses below ParSAR. |
| Stochastic | (14,3,3) | Cover and go long when Stoch % crosses above 20. Cover and go short when Stoch % crosses below 80. |
| RSI | (9) | Cover and go long when RSI crosses above 30. Cover and go short when RSI crosses below 70 |
| Ichimoku Kinko Hyo | (9,26,52,1) | Cover and go long when the conversion line crosses above baseline. Cover and go short when conversion line crosses below baseline |
We tested each of the technical indicators separately on the daily time frame of EUR/USD during the last 5 years using these criteria.
We trade one lot (100,000 units) at a time, with no stop losses or take profit points in place.
When to Move The Position
Once a new signal comes, we simply conceal and move positions. This means that if we were long at the time the signal instructed us to sell, we would cover and open a new short position.
In addition, we assumed we were well capitalized (as advised in our Leverage lesson) and began with a $100,000 hypothetical balance.
We included total pips gained/lost, as well as the maximum drawdown, in addition to the actual profit and loss of each method.
forex without using stop losses
Let us emphasize that we DO NOT RECOMMEND trading forex without using stop losses. This is purely for demonstration purposes! Now, let’s look at the outcomes of our backtest:
| STRATEGY | NUMBER OF TRADES | P/L IN PIPS | P/L IN % | MAX DRAWDOWN |
|---|---|---|---|---|
| Buy And Hold | 1 | -3,416.66 | -3.42 | 25.44 |
| Bollinger Bands | 20 | -19,535.97 | -19.54 | 37.99 |
| MACD | 110 | 3,937.67 | 3.94 | 27.55 |
| Parabolic SAR | 128 | -9,746.29 | -9.75 | 21.96 |
| Stochastic | 74 | -20,716.40 | -20.72 | 30.64 |
| RSI | 8 | -18,716.69 | -18.72 | 34.57 |
| Ichimoku Kinko Hyo | 53 | 30,341.22 | 30.34 | 19.51 |
The Ichimoku Kinko Hyo indicator did the best on its own during the last five years, according to the statistics.
Record analysis
It made a $30,341 profit or 30.35 percent profit. Over the course of five years, this equates to an annual growth rate of slightly over 6%!
Surprisingly, the remainder of the technical indicators performed far worse, with the Stochastic indicator returning a negative 20.72 percent.
Furthermore, all of the indicators resulted in significant drawdowns ranging from 20% to 30%.
Why Ichimoku Kinko Hyo indication is the best?
This does not, however, imply that the Ichimoku Kinko Hyo indication is the best or that technical indicators in general are ineffective. Rather, this demonstrates that they aren’t really useful on their own. So could you choose any specific indicator which is the best technical indicator in forex!
The forex market is comparable. It’s an art form, and as traders, we must learn to use and mix the resources at our disposal in order to devise a method that works for us.
This leads us to our next lesson: combining all of these signs!
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