Last Updated on November 28, 2022 by Mark Ursell
In this article, I show three Ichimoku trading strategies. I then show you the results of how these trading strategies perform on the EUR/USD forex pair. You can also watch a video of me demonstrating the strategies.
I carried out these analyses to find out how good the Ichimoku system is at identifying trends. The trading strategies are mechanical and do not require any judgement or unique interpretation.
Watch the Video
If you would like more information about the strategies you can watch me demonstrate in the accompanying YouTube video:
Read the Transcript
Hello this is Mark from Tradinformed.com and welcome to this video on a profitable Ichimoku
Trading Strategy. I’ve got on the screen at the moment the EUR/USD
on the daily timeframe and I’m showing 4 of the Ichimoku lines. I’ve left off the lagging
line for greater clarity and because I’m not using it in this analysis.
What I’ve picked here is a nice upward trend in the EUR/USD and this is what people trading
the Ichimoku cloud and system are looking for.
Ichimoku is designed to keep traders on the right side of the dominant trend and to hold
onto this trend for as long as possible, until it is clear it has changed direction
What I’m going to do in this analysis, what I wanted to do is find out how well Ichimoku
follows the trend and whether it can be traded on a simple automated basis.
To do this I’ve chosen 3 entry and exit strategies using the Ichimoku lines and I’m going to
see how well they perform just on a simple automated basis.
The first of these strategies is shown here, I’ve got the 3 entry strategies highlighted
here on the left, the price here is closing above the blue line (the base line) and this
is the signal for a long trade, a short trade would be when price closes below this blue
line. Trading strategy number 2 is here, and this
is when the red line (conversion line) crosses, in this case, above the blue line again (the
base line) and if it crosses below that would be a signal to exit the long trade and enter
a short trade Now the 3rd of these strategies uses the most
distinctive feature about the Ichimoku, which is the cloud and you can see here it is actually
when the price has closed above the Senkou B line which is the slower of the cloud lines,
so this is really showing that the trend has changed direction and we can now trade in
the new direction. Now the first 2 of these strategies closed
here and we can see that price has, for the 1st time, closed below the blue line and,
on the same day, the red line has also closed below and so we would enter short at this
time and close our long trade. We actually have to scroll along a little bit further
to see here which is when the price finally closes below the cloud. So we’re actually
holding onto this trade for 6 or 7 months and we really get the market to prove to us
that the trend has changed direction. I wanted to try these 3 different ways of
using the Ichimoku, the 1st 2 and ways of getting in fairly early to the trend and ideally
taken as much profit as possible for the relatively strong moves.
And then the cloud we’re using as a backstop really, for the really strong but slower moving
trades, to keep on board the trends for as long as we possibly can, until its proven,
at this point, that it has changed direction. So the analysis I’m going to carry out, I’m
using Microsoft Excel. And what I would firstly like to say is that I do have a new eBook
available, this is available in the Amazon Kindle Store and, along with Ichimoku, I have
included the Impulse Indicator, Value Charts, Money Flow Index, KST, Balance of Power
If you like trading chart patterns I have Harami, Tweezer Bottom and Double Top Patterns
in there. I show how all of these indicators and patterns can be programmed into Excel.
I give some tips and examples of how to use the indicators and there is also a Free Spreadsheet
that comes with the book and you can start off straight away carrying out your own analyses
using these indicators. So just to recap the trading strategy that
I’m looking at today. The 1st of these is the crossover of the Conversion Line above
and below the Base Line. This is a long-short strategy so immediately we have a crossover
we would reverse the direction of our position Crossover of the Base Line. This is Closing
Price above or below the Base Line. Also a crossover of the Closing Price above
or below the Senkou B line. This is the spreadsheet that I’m using to
calculate, to carry out the analyses, I’m considering them as 3 separate trading strategies
and you can see here that I’ve got all the calculations for the Ichimoku on here which
came straight from the eBook and has just been copied across and the spreadsheet I’m
using here is also available and there is a link on the screen if you would like more
information about this. So I’m using 3 of these spreadsheets to carry out the analysis
for each of the trading strategies and I’ve aggregated the results into a further spreadsheet
here. So what I’m showing here is Strategy 1, 2
and 3 profit and loss and our Capital. So I have the metrics here to show how the trading
strategy has performed over time and this is quite a long time period. I started here
in 1992 and the data goes up to the middle of December 2014.
I just want to add a quick look at the capital balance here. We can see that it is actually,
very surprisingly constant, all the way from 1992 to 2003. So it is showing not extreme
profits or extreme losses but a nice steady gain during that time period. Things slowed
down and the capital was a lot flatter until really the start of the financial crisis 2007
into 2008, 2009, 2010. Then the strategy performed very well indeed and the capital increased
significantly over this time period. For those of you who have traded since here which is
2010 11 the eurozone situation calmed down and Mario Draghi promised to do “whatever
it takes” the Central Banks really took over the currency market for a long time here.
We can see right at the end here we’ve had a big fall in the value of the euro vs the
US dollar. It remains to be seen in 2015 and beyond whether or not this is going to signal
a return to previous levels of volatility. But in any case we are showing here that the
strategy or the 3 strategies have all been profitable and have all performed quite consistently
well over a long period of time. My conclusions here are that these 3 very simple strategies,
very simple trading rules it would take no time at all for anybody to use these trading
rules in their daily lives. It would only have to be once a day to check the charts.
They can of course be improved, I say this for all of my videos, this is really a just
for most people just a start.Identify the major trend but I would say, from this video
that I’ve shown fairly comfortably, to my own satisfaction that Ichimoku is a good way
of identifying trends and can be simply and profitably traded on the EUR/USD pair on the
daily timeframe. If you would like more information about backtesting and using Excel, market
analysis and generally about the financial markets please go to: www.tradinformed.com
Ichimoku Kinko Hyo – The Power of Trends
Ichimoku is a trading system that originated in Japan. Developed by journalist Goichi Hosoda, it is designed to help you identify and trade with the dominant trend.
The lines look quite complicated on the chart, but you can easily use them as part of an automated trading strategy.
Trend following is by far the easiest way to get extraordinary winning trades. Just one or two of these trades makes the difference between an average year and a spectacular year.
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 one of the Ichimoku trading strategies 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.
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.
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The power to backtest strategies will transform your trading:
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The analysis on this page was carried out using a Tradinformed Backtest Model. 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.