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Ichimoku Trading Strategies and Systems Backtested: Does It Work?

Would an Ichimoku Trading System generate profits?  Let’s backtest it.

Ichimoku Trading Strategies are popular because they have purported success, are aesthetically pleasing on the screen, and having a really cool sounding name.  The full name of the indicator is Ichimoku Kinko Hyo, which translated from Japanese means “One Glance Equilibrium Chart”.  The immediate thought when people think of the Ichimoku Kinko Hyo indicator would be trading with the Ichimoku Clouds.  This is an opportunity to introduce the indicator in a different light and test its effectiveness in a variety of situations.

What is the Ichimoku Kinko Hyo?

It is an indicator that overlays onto a chart that is rooted in Moving Averages as well as elements of past prices.  It provides a glance at the trend, support and resistance, and volatility.  It’s a multi-faceted indicator that lives up to its name.

Ichimoku Kinko Hyo Trading does not require in MetaTrader 4 or 5 the addition or download of a custom-made indicator as it is already pre-loaded with the platform.  The colors associated with the Kumo have been changed to make everything pop on the screen rather than sticking with the default colors, you will see how you can do that too.

ichimoku trading strategies

There are several elements of the Ichimoku Trading Indicator as illustrated above:

Tenkan-Sen (Red Line):  This is known as the turning line and it is much like a fast moving average.  However, it is not a 9 period Simple Moving Average or Exponential Moving Average.  It actually takes the Highest High and Lowest Low of the past 9 periods and divides it by 2.

Kijun-Sen (Blue Line):  This is a medium moving average of sorts much like Tenkan-Sen.  However, unlike Tenkan-Sen, it encompasses a much larger span of periods.  It takes the Highest High and Lowest Low of the past 26 periods and divides it by 2.

Chikou Span (Green Line):  This is commonly referred to as “the lagging line”.  This the current closing price printed 26 periods behind.  It is used to help determine the big picture.

Senkou Span A and B (Dark Turquoise/Maroon Line):  Senkou Span A and B create the Kumo (Cloud).  Senkou Span A simply averages Tenkan-Sen and Kijun-Sen and plots it 26 periods ahead.  Senkou Span B takes the Highest High and Lowest Low of the past 52 periods, divides it by 2 and plots the result 26 periods ahead.

Kumo:  The Kumo is the space that is in between Senkou Span A and B.

Changing the Color Settings of Ichimoku Kinko Hyo in MetaTrader 4

The inputs are the elements that can be changed as far as the indicator calculations on the chart are concerned.

ichimoku trading settings

The ‘Colors’ tab is the tab of concern here because the default colors are drab and do a weak job of illustrating things.

The # Column has the Buffer Number associated with the particular color and line.

ichimoku mt4

  • 0 is Red, which is Tenkan-Sen.
  • 1 is Blue, which is Kijun-Sen.
  • 2 is by default Sandy Brown, which is Senkou Span A’s Kumo Color.
  • 3 is by default Thistle, which is Senkou Span B’s Kumo Color.
  • 4 is Lime, which is the Chikou Span
  • 5 is by default Sandy Brown, which is the Senkou Span A’s Boundary Line Color.
  • 6 is by default Thistle, which is the Senkou Span B’s Boundary Line Color.

Going forward, we’re going to change up the colors of Senkou Span A and B to illustrate their bullish and bearish tendencies.  Senkou Span A’s color is considered the Up Kumo Color and Senkou Span B’s color is considered the Down Kumo Color.

There were changes to the boundary lines to help make them pop for the purposes of illustration, but you are not going to actually use the chart to place trades.  Rather, you are going to see how Ichimoku Trading works in theory and then automate the process with code.

ichimoku indicator

How are Basic Ichimoku Trading Strategies interpreted and executed?

There are many different Ichimoku Trading Systems and Ichimoku Trading Strategies, but it is important to understand the basic interpretations of this indicator before jumping into them.

Tenkan-Sen (Red Line) – Provides Market Trends and Directionality

  • If the market price is greater than the Tenkan-Sen Line, it is a short-term bullish sign.
  • If the market price is lower than the Tenkan-Sen Line, it is a short-term bearish sign.
  • If this line is flat, the market is ranging.
  • If this line is moving upward, the market is moving upward.
  • If this line is moving downward, the market is moving downward.

Kijun-Sen (Blue Line)

  • It is considered an indicator of future price movement.
  • If the price is higher than the blue line, the price is expected to keep rising.
  • If the price is lower than the blue line, the price is expected to keep falling.

Tenkan-Sen (Red Line) and Kijun-Sen (Blue Line) Crossovers

  • Behave much like Moving Average Crossovers
  • If Tenkan-Sen crosses above Kijun-Sen, considered a bullish sentiment.
  • If Tenkan-Sen crosses below Kijun-Sen, considered a bearish sentiment.

Chikou Span (Green Line)

  • If the Chikou Span is below the price from 26 periods ago, this is a bearish sign.
  • If the Chikou Span is above the price from 26 periods ago, this is a bullish sign.
  • This is typically used as a filter for trades.

Kumo (The Cloud)

  • This is a flexible and changing Support and Resistance Zone.
  • If the price is above the Kumo, it is a bullish sign.
  • If the price is below the Kumo, it is a bearish sign..
  • When the price is above the Kumo, the Upper Boundary serves as the first level of Support and Lower Boundary serves as the second level of Support.
  • When the price is below the Kumo, the Lower Boundary serves as the first level of Resistance and Upper Boundary serves as the second level of Resistance.
  • When the Senkou Span lines cross, the Kumo Cloud changes color to reflect bearishness or bullishness.  When Senkou Span A crosses below Senkou Span B, it is a bearish signal.  When Senkou Span A crosses above Senkou Span B, it is a bullish signal.

Testing Ichimoku Trading Strategies and Systems

The procedure will be for the past two years from June 1, 2016 through May 31, 2018.  It will be tested across different timeframes and follow the rules according to the strategies implemented as far as the Ichimoku Trading Setups (entries and exits).

Ichimoku Trading Strategies Used:

  • Double Crossover Ichimoku Trading System
  • Kumo Breakout
  • Kijun-Sen Price Crossover

Double Crossover Ichimoku Trading System

This system is described as the “Best Ichimoku Strategy”.  Let’s put it to the test!

The Rules for this Ichimoku Trading Technique:

  • Time Frame:  Any, but the creator says that a Higher Time Frame is better.  1 Hour Time Frame.
  • Currency Pair:  Any, but we are using EURUSD.

For a Bullish Position Entry:

  1.  The price must have broken out above the Ichimoku Cloud (Kumo).
  2.  The Tenkan-Sen Line must cross above the Kijun-Sen Line.
  3.  Buy after the crossover on the formation of the next candle.

For a Bullish Position Stop Loss:

Place the Stop Loss below the Bullish Breakout Candle that pushed above the Ichimoku Cloud.

For a Bullish Position Take Profit:

The Tenkan-Sen Line must cross below the Kijun-Sen Line.


For a Bearish Position Entry:

  1.  The price must have broken out below the Ichimoku Cloud (Kumo).
  2.  The Tenkan-Sen Line must cross below the Kijun-Sen Line.
  3.  Sell after the crossover on the formation of the next candle.

For a Bearish Position Stop Loss:

Place the Stop Loss above the Bearish Breakout Candle that pushed below the Ichimoku Cloud.

For a Bearish Position Take Profit:

The Tenkan-Sen Line must cross above the Kijun-Sen Line.

ichimoku trading system

The results were a bit disappointing, but with more rules and more flexibility with setups, there is potential.

Kumo Breakout Strategy

  • Time Frame:  The creator says that a Position Trading approach is best.  Daily Chart (only three trades, so the 1 Hour Chart was used).
  • Currency Pair:  Any, but we are using EURUSD.

For a Bullish Position Entry:

  1.  The price rises above the Kumo cloud.
  2.  The leading Kumo shows a bullish sentiment.

For a Bullish Position Stop Loss:

Place the Stop Loss 15 pips below the lower Kumo boundary on the candle upon the long trade is placed.

For a Bullish Position Take Profit:

Price breaks below the Kumo cloud.

For a Bearish Position Entry:

  1.  The price rises above the Kumo cloud.
  2.  The leading Kumo shows a bearish sentiment.

For a Bearish Position Stop Loss:

Place the Stop Loss 15 pips above the upper Kumo boundary on the candle upon the short trade is placed.

For a Bearish Position Take Profit:

Price breaks above the Kumo cloud.

ichimoku trader

Kijun-Sen Crossover Strategy

  • Time Frame:  The creator says that a Position Trading approach is best.  Daily Chart did not have enough opportunities, 4 Hour Chart provided more trades.
  • Currency Pair:  Any, but we are using USDJPY.

For a Bullish Position Entry:  The Tenkan-Sen rises above the Kijun-Sen.

For a Bullish Position Stop Loss: The Tenkan-Sen falls below the Kijun-Sen.

For a Bullish Position Take Profit:  The Tenkan-Sen falls below the Kijun-Sen.

For a Bearish Position Entry:  The Tenkan-Sen falls below the Kijun-Sen.

For a Bearish Position Stop Loss: The Tenkan-Sen rises above the Kijun-Sen.

For a Bearish Position Take Profit:  The Tenkan-Sen rises above the Kijun-Sen.

Are the Ichimoku Trading Strategies worthy?

Yes and no.  These Ichimoku Trading Systems that were published on the Internet enjoyed mixed results during the trading period.  There are things that can be done to improve these strategies using the Ichimoku Kinko Hyo indicator alone, but the purpose is to show how well strategies that are published on the Internet with the Ichimoku indicator fared and the lesson is that this is not a perfect indicator.  However, these strategies could have done a better job filtering the trades with the Ichimoku Trading indicator.  There were opportunities missed with the Chikou Span and with the Senkou Spans.

There are ways to scalp with the Ichimoku indicator as well, but it is a matter of finding that right balance.

Remember, for every kumo there is a silver lining.  It’s a possibility to incorporate in your Forex portfolio, but make sure to go through the development efforts first before letting it loose in a live environment as part of an algorithm.

The post Ichimoku Trading Strategies and Systems Backtested: Does It Work? appeared first on Freevestor.



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