The Ichimoku Crossover trading strategy is a popular Ichimoku trading strategy that uses the cloud and the intersection of two baselines to determine the market turning point. The Ichimoku Crossover Trading Strategy has proven to be a profitable Forex trading strategy.
How to use the Ichimoku cloud and how to read the Ichimoku indicator
The Ichimoku indicator has three input parameters. Default settings: Tenkan-sen - 9, Kijun-sen - 26, Senkou-Span B - 52. In our analysis of the trading strategy, we used the default settings of the Ichimoku indicator.
The indicator has 5 base lines, and to read the Ichimoku indicator, you first need to understand the meaning of these lines:
The Tenkan-Sen Line, also called the Conversion Line, is the midpoint of the last 9 candles. It is calculated using the following Ichimoku formula: [(9-period high + 9-period low)/2].
The Kijun-Sen line, also called the Baseline, is the midpoint of the last 26 candles. It is calculated using the following formula: [(26-period high + 26-period low)/2].
The Chiou Gap, also called the Lagging Gap, lags the price (as the name suggests). The lag interval is plotted 26 periods ago.
Senkou Band A, also called Leading Band A, is one of the two cloud boundaries and is the midpoint between the Transformation Line and the Baseline: [(Transformation Line + Baseline)/2]. This value is mapped 26 periods into the future and is the faster edge of the cloud.
Range B Senkou, or Leading Range B, represents the second boundaries of the Cloud and is the midpoint of the last 52 price bars: [(52-period high + 52-period low)/2]. This value is plotted 52 periods into the future and is the boundary of the slower cloud.
A trader can use the Ichimoku indicator to determine the current trend direction. Here are a few basic interpretations of the Ichimoku cloud:
When the price is above the Cloud, the trend is bullish
When the price is below the Cloud, the trend is bearish
When the price is in the middle of the Cloud - the trend is consolidating or fluctuating
How to trade with the Ichimoku indicator
Trading with Ichimoku is very easy. The trader must wait until the price rises above the Cloud. Then the transform line should be above the baseline. This will be a buy signal. For a bearish (sell) signal, the trader must wait until the price falls below the Cloud, and when the conversion line crosses the Baseline down, it is a sell signal.
Initial back test
For backtesting purposes, we coded the full Ichimoku trading strategy as a MetaTrader 4 Expert Advisor. Through preliminary analysis, we determined that the best time frame for the Ichimoku trading strategy is 1 hour (H1). We retested the Ichimoku strategy using the standard Ichimoku MT4 indicator. For our test, we used a trailing stop of 45 pips as a trade exit rule, which is triggered after the start of the trade and changes with each new 1 pip of profit. From our point of view, this approach allows you to maximize profits and minimize drawdown.
We tested on 2009.01.01-2021.01.24 using a per-tick simulation on EURUSD-H1 using 1:10 leverage, no reinvestment, assuming a spread of 10 ticks. These are the main performance parameters of the Ichimoku crossover trading strategy in its unoptimized state:
ROI 1.96%
Number of transactions 3085
Win rate 38.38%
Max. Drawdown 16.00%
Trade data analysis
After running an initial test of a simple unfiltered strategy, we analyze trading data to identify possible filters to use to make the strategy more profitable while reducing drawdown.
The following charts can give you some idea of what filters should be applied (time sessions, weekday cap, trend strength threshold, overbought/oversold conditions, volatility range) to make this strategy profitable if you decide to use this strategy in your investment portfolio.
Optimization
The Ichimoku indicator can be used along with other indicators to filter out losing trades and increase the accuracy of entry signals. After analyzing the trading data, we found the following findings that helped us increase the profitability of the Ichimoku crossover trading strategy by 10 times, while reducing its drawdown by 4 times:
Trades that were entered at too low and too high ADX values seemed to generate more losses when trading the Ichimoku Crossing trading strategy during 2009-2020. ADX shows the strength of the current trend. It is wiser to enter into transactions at the beginning of a trend. ADX.
(Increased ROI by 1.9% -> .5%, reduced drawdown by 16% -> 5.7%)
Most of the buy trades that were entered at a too low Stochastic value, and most of the sell trades that were opened at a too high Stochastic value, were unprofitable when trading the Ichimoku Crossover trading strategy during 2009-2020. It is risky to make deals in overbought and oversold zones.
(Increased ROI by 1.9% -> 4.6%, reduced drawdown by 16% -> 6.94%)
Most of the trades that were opened in the borderline state of the RVI signal were unprofitable when trading the Ichimoku Crossing trading strategy during 2009-2020. It is preferable to conclude transactions in a more stable market.
(Increased ROI by 1.9% -> 3.9%, reduced drawdown by 16% -> 5.67%)
Optimization results
We analyzed the data obtained from testing the Ichimoku crossover trading strategy in 2009-2019 and applied some filters such as Stochastic, ADX and RVI. As a result, the profitability of the strategy increased from 19.66% to 40.25%, and its drawdown decreased from 16.00% to 1.66% using 1:10 leverage.
Back test after optimization
Reducing the drawdown by more than 8 times allowed us to increase the leverage that can be used when trading this strategy to 1:35, which in turn resulted in an annualized return on investment of 140.25%!
The decrease in drawdown also allowed us to use risk-based lot calculation. Below you can see the backtesting results using a starting balance of $10,000 and 20% risk per trade:
ROI 26077%
Number of transactions 443
Win rate 49.44%
Max. Drawdown 10.80%
Analyze your trading strategy!
If you have a trading strategy that you want to analyze, optimize and increase its profitability (or even turn it from a losing to a profitable Forex trading strategy) - do not hesitate to contact us! Our trade data analysis team will respond to you within 24 hours with all the necessary details.
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Disclaimer: Hypothetical or simulated performance results have certain limitations, unlike real performance, simulated results do not reflect actual trading. In addition, because no transactions have taken place, the results may be under or over offset by the impact, if any, of certain market factors such as lack of liquidity.
Simulated trading programs in general also depend on the fact that they are designed with hindsight in mind. No representation is made that any account will, or is likely to, generate profits or losses similar to those shown.
Past results are not necessarily indicative of future results. The customer is responsible for using the product at his own risk and Robobroker is not responsible for any possible damages caused by the use of the product, including but not limited to damages.
