LOWER YOUR

TRADING COST

FOREIGN EXCHANGE AND OTHER LEVERAGED

TRADING INVOLVES SIGNIFICANT RISK OF
LOSS

1.2

Learn How to Trade Forex. A Beginner's Guide to Forex Trading.

MAR
2016

Sign In

LEARN MORE

Join

Search...

BabyPips.com > School > Elementary > Popular Chart Indicators > What is the Best Technical Indicator in Forex?

Preschool

0%

Kindergarten

0%

Elementary

0%

Middle School

0%

Summer School

0%

High School

0%

Undergraduate

0%

Graduation

0%

What is the Best Technical

Indicator in Forex?
Now on to the good stuff: Just how profitable is each technical indicator on
its own? After all, forex traders dont include these technical indicators just to
make their charts look nicer. Traders are in the business of making money!
If these indicators generate signals that dont translate into a profitable
bottom line over time, then theyre simply not the way to go for your needs!
In order to give yall a comparison of the effectiveness of each technical
indicator, weve decided to backtest each of the indicators on their own for
the past 5 years.
Backtesting, the expertise of our resident forex robot Robopip, involves
retroactively testing the parameters of the indicators against historical price
action. Youll learn more about this in your future studies. For now, just take
a look at the parameters we used for our backtest.
Indicator
Bollinger
Bands

MACD

Parabolic
SAR

Stochastic

RSI

Ichimoku
Kinko Hyo

Parameters Rules
(30,2,2)

Cover and go long when daily closing price crosses below

lower band. Cover and go short when daily closing price
crosses above upper band.

(12,26,9)

Cover and go long when MACD1 (fast) crosses above

MACD2 (slow). Cover and go short when MACD1 crosses
below MACD2.

(.02,.02,.2)

Cover and go long when daily closing price crosses above

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

(14,3,3)

Cover and go long when Stoch % crosses above 20. Cover

and go short when Stoch % crosses below 80.

(9)

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

(9,26,52,1)

Cover and go long when conversion line crosses above

baseline. Cover and go short when conversion line crosses
below base line

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 are
trading 1 lot (thats 100,000 units) at a time with no set stop losses or take
profit points. We simply cover and switch position once a new signal appears.
This means if we initially had a long position when the indicator told us to
sell, we would cover and establish a new short position.
Also, we were assuming we were well capitalized (as suggested in our
Leverage lesson) and started with an example balance of $100,000. Aside
from the actual profit and loss of each strategy, we included total pips
gained/lost and the max drawdown.
Again, let us just remind you that we DO NOT SUGGEST trading forex
without any stop losses. This is just for illustrative purposes only! Moving on,
here are the results of our backtest:

School Sponsors

Strategy

Number of Trades P/L in Pips

P/L in % Max Drawdown

Buy And Hold

-3,416.66

-3.42

25.44

Bollinger Bands

20

-19,535.97

-19.54

37.99

MACD

110

3,937.67

3.94

27.55

Parabolic SAR

128

-9,746.29

-9.75

21.96

Stochastic

74

-20,716.40

-20.72

30.64

RSI

-18,716.69

-18.72

34.57

Ichimoku Kinko Hyo

53

30,341.22

30.34

19.51

The data showed that over the past 5-years, the indicator that performed
the best on its own was the Ichimoku Kinko Hyo indicator. It generated a
total profit of $30,341, or 30.35%. Over 5 years, that gives us an average of
just over 6% per year!
Surprisingly, the rest of the technical indicators were a lot less profitable,
with the Stochastic indicator showing a return of negative 20.72%.
Furthermore, all of the indicators led to substantial drawdowns of between
20% to 30%. However, this does not mean that the Ichimoku Kinko Hyo
indicator is the best or that technical indicators as a whole are useless.
Rather, this just goes to show that they arent that useful on their own.
Think of all those martial arts movies you watched growing up. Aside from
The Rock and the Peoples Elbow, no one relied on just one move to beat all
the bad guys. Each of them used a combination of moves to get the job
done. Forex trading is similar. It is an art and as traders, we need to learn
how to use and combine the tools at hand in order to come up with a system
that works for us. This brings us to our next lesson: putting all these
indicators together!
Previous
Lesson

Mark Lesson
Complete

Next
Lesson

Save your progress by signing in and marking the lesson complete!

How to Use Bollinger Bands

How to Use the MACD Indicator
How to Use Parabolic SAR
How to Use the Stochastic Indicator
How to Use RSI (Relative Strength Index)
How to Use ADX (Average Directional Index)
Ichimoku Kinko Hyo
Trading with Multiple Chart Indicators
What is the Best Technical Indicator in Forex?
Summary: Popular Chart Indicators

BabyPips.com
Learn How to Trade Forex. BabyPips.com Is
The Beginner's Guide to Forex Trading.

LEARN FOREX

FOREX TOOLS

COMPANY

WEBSITE

What is Forex?
Forex Articles and
News
Forex Tutorials

Forex Calendar
Forex Calculators
Choose a Forex Broker

About Us
Contact Us
Advertise
Contribute

Privacy Policy
Risk Disclosure
Terms of Use
FAQ

Your Best Source for Forex Education on

the Web.

Forex Quizzes
Forex Forums
Forex Glossary

Copyright 2005-2016 BabyPips.com LLC. All rights reserved.

Facebook

Google+

Testimonials

Twitter

"When life gives you lemons, make lemonade."

Origin Unknown