What is the Best Technical Indicator in Forex?

W

hich technical indicator should I use more often than the others?

Every trader decides this on the basis of their trading style, but fortunately we have a way to easier things a bit and show you how the indicators did in the past. 

We will backtest each of the indicators for the past 5 years and will give the results. 

Backtesting means retroactively testing the parameters of the indicators against historical price action.

Here are the parameters we used for our backtest.

Bollinger Band:

  • Cover and go long when daily closing price crosses below the lower band. 
  • Cover and go short when daily closing price crosses above the upper band.

MACD:

  • Cover and go long when MACD1 (fast) crosses above MACD2 (slow). 
  • Cover and go short when MACD1 crosses below MACD2.

Parabolic SAR :

  • Cover and go long when daily closing price crosses above ParSAR. 
  • Cover and go short when daily closing price crosses below ParSAR.

Stochastic:

  • Cover and go long when Stoch % crosses above 20. 
  • Cover and go short when Stoch % crosses below 80.

RSI:

  • Cover and go long when RSI crosses above 30. 
  • Cover and go short when RSI crosses below 70

Ichimoku Kinko Hyo:

  • Cover and go long when the conversion line crosses above baseline.
  • Cover and go short when conversion line crosses below baseline

By using these parameters, we tested each of the technical indicators on its own on the daily time frame of EUR/USD over the past 5 years.

We traded 1 lot (that’s 100,000 units) at a time with NO stop losses or take profit points.

What we did was just switch positions every time a new signal appears. 

For example, we initially had a long position. But then the indicator told us to sell, so we would cover and establish a new short position.

Also, we hypothetical started with leverage, so in the beginning our balance was s $100,000.

Aside from the actual profit and loss of each strategy, we included total pips gained/lost and the max drawdown.

DO NOT TRADE forex WITHOUT any STOP LOSSES. 

You will see in the table that this doesn’t lead to good results. Most of the time you will reach a ZERO balance. We use no stop losses, just to show you how each indicator can work on its own if it doesn’t have any “airbags” to prevent losses.

(table)

The champion of them all is Ichimoku Kinko Hyo! Congrats! 

It generated a total profit of $30,341, or 30.35%. 

When we divided it over 5 years, it gives us an average of just over 6% per year!

You might be surprised that the rest of the technical indicators were not profitable at all. 

Bollinger bands showed a return of NEGATIVE 19.54% and Stochastic went even lower at -20.72%.

DON’T TAKE these results as a proven fact that the Ichimoku Kinko Hyo indicator is the best and that the other indicators are a complete waste of your time. 

This is NOT the case. They just aren’t that useful on their OWN. 

You need to use them in combination with each other to make some sweet money instead of seeing a negative balance. 

Let’s go to our next lesson and get together our band of indicators!

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