Trading Strategies Revealed -“Ichimoku Crossover” review

Trend following trading strategy “Ichimoku Crossover” is a popular Ichimoku trading strategy that uses the cloud and crossover of two base lines to define the market reverse point. Ichimoku crossover trading strategy has appeared to be a profitable Forex trading strategy.

How to use Ichimoku Cloud and how to read Ichimoku Indicator

There are three input parameters in Ichimoku indicator. Default settings are: Tenkan-sen – 9, Kijun-sen – 26, Senkou Span B – 52. In our trading strategy analysis we have used default settings of Ichimoku indicator.

The indicator has 5 base lines and to read Ichimoku indicator it is required to understand the meaning of these lines first of all:
  • Tenkan-Sen line, also called the Conversion Line, represents the midpoint of the last 9 candlesticks. It is calculated with the following Ichimoku formula: [(9-period high + 9-period low)/2].
  • Kijun-Sen line, also called the Base Line, represents the midpoint of the last 26 candlesticks. It is calculated with the following formula: [(26-period high + 26-period low)/2].
  • Chiou Span, also called the Lagging Span, lags behind the price (as the name suggests). The Lagging Span is plotted 26 periods back.
  • Senkou Span A, also called the Leading Span A, represents one of the two Cloud boundaries and it’s the midpoint between the Conversion Line and the Base Line: [(Conversion Line + Base Line)/2]. This value is plotted 26 periods into the future and it’s the faster Cloud boundary.
  • Senkou Span B, or the Leading Span B, represents the second Cloud boundaries and it’s 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 it is the slower Cloud boundary.
A trader can use Ichimoku Indicator to identify current trend direction. Here are some basic interpretations of 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 ranging

How to trade using Ichimoku Indicator

Trading with Ichimoku is very simple. A trader should wait for the price to trade above the Cloud. Then the Conversion Line needs to break above the Base Line. This will be a buy signal. For a bearish (sell) signal a trader should wait for the price to trade below the Cloud and when the Conversion line crosses the Base line downwards it is a sell signal.

Initial back-test

To run a back-test we have coded a complete Ichimoku trading strategy as a MetaTrader 4 Expert Advisor. During preliminary analysis we have identified that the best time frame for Ichimoku trading strategy is 1 hour (H1). We have run a back-test of Ichimoku strategy using standard MT4 Ichimoku indicator. For our test as a trade exit rule we have used a Trailing Stop of 45 pips which is launched after a trade has started and is modified each new 1 pip of profit. From our point of view, such approach allows to maximize profit and minimize drawdown.

We have run the test for 2009.01.01-2019.10.23 using Every Tick modelling on EURUSD-H1, using 1:7 leverage, without reinvestment, assuming spread equals 10 ticks. These are the main parameters of Ichimoku Crossover trading strategy performance at its non-optimized state:

ROI# of tradesWinning ratioMax. drawdown
210.53%278637.19%66.65%

Trading data analysis

After running the initial test of a simple non-filtered strategy we perform a trading data analysis that allows to identify possible filters to use to make the strategy more profitable reducing the drawdown simultaneously.

The following charts may give some possible insights on which filters to apply (time sessions, day of week limitation, trend strength threshold, overbought/oversold conditions, volatility range) to turn this strategy profitable should you decide to use this strategy in your investment portfolio:



Optimization

Ichimoku indicator can be used with other indicators to filter out losing trades and make entry signals more accurate. After analysing trading data we have found the following insights which have helped us to increase the profitability of Ichimoku Crossover trading strategy in 2 times reducing it’s drawdown in 4 times:

  1. Trades that were opened at a higher value of ADX brought more losses when trading “Ichimoku Crossover” trading strategy during 2010 – 2019. The probability that the market will reverse is more at higher values of ADX. (ROI increase 21% -> 38%, Drawdown reduction 66% -> 35%)
  2. Buy trades that were opened at too low value of RVI brought more losses when trading “Ichimoku Crossover” trading strategy during 2010 – 2019.  RVI measures the strength of a trend. (ROI increase 21% -> 41%, Drawdown reduction 66% ->36%)
  3. It was unprofitable to trade “Ichimoku Crossover” trading strategy during 2010 – 2019 at times when distance between Bollinger bands was too large. Since Bollinger bands is an indication of market volatility, it is reasonable to avoid such market conditions. (ROI increase 21% -> 47%, Drawdown reduction 66% -> 28%)

Optimization results

We have analysed data received from a test of Ichimoku Crossover trading strategy during 2009 — 2019 years and applied some filters such as Stochastic, ADX, Bollinger Bands, RVI and SAR. As a result, the profitability of the strategy has increased from 21.05% up to 45.39% and it’s drawdown has reduced from 66.65% to 16.40% using leverage 1:7.

Post-optimization back-test

Reducing the drawdown more than 4 times has allowed us to increase the leverage that can be used while trading this strategy up to 1:25, which in turn, has resulted in annualized ROI increase up to 153.25%!

ROI# of tradesWinning ratioMax. drawdown
1532.75%95542.19%23.14%

Analyze your trading strategy!

If you have a trading strategy that you want to analyse, optimize and increase its profitability (or even turn it from losing into a profitable Forex trading strategy) – feel free to contact us! Our trading data analysis team will respond to you within 24 hours clarifying all the details needed.

Nordman Algorithms’ trading software developers have more than 10 years of experience in MT4 EA programming and NinjaTrader Automated Strategies development.
Make a request on your custom trading strategy automation of any complexity and we will send you an individual offer!

Disclaimer: Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity.

Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Past performance is not necessarily indicative of future results. The customer is responsible for using the product at his or her own risk and “Nordman Algorithms” is not responsible for any possible losses caused by use of the product, including but not limited to losses.