In this article, I show three strategies using the Ichimoku trading system. In fact, because the system is so versatile, I look at three different Ichimoku trading strategies. I then show you the results of how these trading strategies perform on the EUR/USD forex pair.
I carried out these analyses to find out how good the Ichimoku system is at identifying trends. The trading strategies are simple and do not require any judgement or unique interpretation.
Ichimoku Kinko Hyo
Ichimoku is a trading system that originated in Japan. Developed by journalist Goichi Hosoda, it is designed to help traders identify and trade with the dominant trend. The lines look quite complicated on the chart, but we can easily use them as part of an automated trading strategy.
Conversion and Base Line
The red line is the Conversion Line (tenkan sen) and is the quickest to react. The blue line is the Base Line (kijun sen). The Base Line is slower, and we use it for confirmation.
The most unusual thing about the Ichimoku is the cloud. The cloud is a slow-moving area on the chart that helps to identify the trend and provides support and resistance.
The cloud is made up of two lines: Senkou A and Senkou B. Senkou A is the fastest and makes the inner edge of the cloud. Senkou B is slower and forms the outer edge.
The Chikou Span is the green line. It is made by plotting the closing price 26 periods back.
The Ichimoku Trading Strategies
All three trading strategies are either long or short. Each trading strategy starts with capital of $100,000. The rules of the strategies are:
- Strategy 1: Trade long when the Conversion Line crosses above the Base Line. Trade short when the Conversion Line crosses below the Base Line.
- Strategy 2: Trade Long when the Closing Price crosses above the Base Line. Trade Short when the Closing Price crosses below the Base Line.
- Strategy 3: Trade Long when the Closing Price crosses above the Senkou Span B line (slow cloud line). Trade Short when the Closing Price crosses below the Senkou Span B line.
Being able to test your strategies will transform your trading. You will be able to choose the the best and most profitable strategies. Then trade with confidence, knowing that your strategy has performed well.
The analysis on this page was carried out using a Tradinformed Backtest Model. These are an excellent way for traders to test their strategies. The models are created in Excel and allow you to test different markets, try different indicators and entry conditions. To see the latest models check out the Tradinformed Shop.
The data used for the backtest is the EUR/USD forex pair on the daily timeframe. I tested the data from May 1992 to December 2014.
The results of the three trading strategies are:
|Gross Winning Trades||$504,227||$168,253||$310,503|
|Gross Losing Trades||$-351,868||$-121,630||$-226,297|
|Largest Winning Trade||$20,148||$20,896||$19,413|
|Largest Losing Trade||$-5,471||$-2,894||$-2,946|
The equity curve of the three strategies combined is:
All three of the trading strategies were profitable over the 22 year testing period. This is very encouraging because it shows that, over time, the Ichimoku can be useful in all market types.
Looking at the equity curve above it is clear that the strategy performs better when volatility is higher and the trend is strong. The period between 2006 and 2011 was notable for big swings in forex valuation as the dollar alternately weakened and strengthened during the financial crisis. The strategy performs poorly during the period 2011 – mid 2014. During this time volatility declined as the world’s central banks became the biggest players in the forex markets.
If you would like more information about the strategies you can watch the accompanying YouTube video: