What are the best indicators for day trading? After we studied several kinds of forex indicators in the previous chapters, it might make you wonder, what are the best indicators for day trading?
This is a very good question because in forex trading it’s not just making the appearance of a graphic look beautiful. Even though you see the appearance of the graphic you look beautiful. But if in practice it still often gives an inaccurate signal. Then it can be said to have not reached the goal of what you need.
Because the purpose of forex trading is to make a profit, so to find the best technical indicator in forex actually takes years. You need to do that to test one indicator with another then compare which one is the best that provides better profits in the long run.
But if you are really a beginner, another way to get information in determining the best indicators is to read from the experience of traders who have been doing backtest for years.
In this case, I will take an example from Babypips as a reference in determining the best technical indicator in forex.
TenkoFX broker, a brokerage firm that serves forex traders to trade on the forex, CFD and crypto trading markets.
Regulated by the International Financial Services Commission (IFSC) of Belize.
Which is the best technical indicator?
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There are still many other types of indicators out there. With developers becoming increasingly crowded these days making graphics appear more interactive.
But we will not talk about indicators out there in selecting the best indicators on this topic, and we will focus on the final results of each indicator’s backtest.
But before we start we will try to provide requirements regarding good trading performance, it should meet several requirements.
- First is the total profit, of course, good trading performance is to provide high profits.
- Second is a drawdown. Drawdown is a loss that can occur on a trading account.
- Third The number of positions each day, the indicator may give signals that are different from one another, the total position will also affect the results of trading, the more often the signal the riskier.
- Fourth is the average win and average loss if in one day the signal that appears from the indicator gives more win trades, then this is good and is directly proportional to the total profit.
- Fifth, the total percent win rate, this is the overall calculation of the trading results, the higher the win rate, the better the trading performance.
Backtest indicator parameters
At this backtest, it takes approximately five years.
The parameters used in the data table below for each indicator.
|Bollinger band||30,2,2||Close and Buy when the daily closing price crosses below the lower band. Close and Sell when the daily closing price crosses above the upper band.|
|MACD||12,26,9||Close and Buy when MACD1 (fast) crosses above MACD2 (slow). Close and Sell when MACD1 crosses below MACD2.|
|Parabolic SAR||02,02,2||Close and Buy when the daily closing price crosses above the PSAR. Close and Sell when the daily closing price crosses below the PSAR.|
|Stochastic||14,3,3||Close and Buy when% Stoch crosses above 20. Close and Sell when Stoch% crosses below 80.|
|RSI||9||Close and buy when the RSI crosses above 30. Close and Sell when the RSI crosses below 70|
|Ichimoku Kinko Hyo||9,26,52,1||Close and Buy when the conversion line crosses above the baseline. Close and Sell when the conversion line intersects below the baseline|
In this backtest the pair that is chosen is EURSD with daily timeframes, so all indicators are tested on one pair for about five years. The trade size used is 1 standard lot or 100,000 units, without placing a stop loss and taking a profit.
So the way to trade is to close the old position and then switch to the new position when the new signal appears.
In practice, it is not recommended to trade without stop loss, but this is only a backtest and maybe only using a demo account.
The capital used as a starter balance is 100,000 $
Backtest indicator result
From the backtest that has been done for five years, it turns out that the best indicator is Ichimoku Kinko Hyo, who recorded the biggest profit, with a low max drawdown.
You can see the results in the table below.
|STRATEGY||NUMBER OF TRADES||Profit/Loss In pips||Profit/Loss In %||MAX DRAWDOWN|
|Buy And Hold||1||-3,416.66||-3.42.||25.44.|
|Ichimoku Kinko Hyo||53||30,341.22||30.34||19.51|
Conclusion backtest result
From the table above it turns out that over a period of 5 years, the indicator that provides the highest profit is Ichimoku Kinko Hyo with a total profit of $ 30,341, or 30.34%.
This means that in a year he gets an average profit of 6% per year, with a drawdown of only 19.51% So of all the indicators that have taken part in this test, the best indicator is Ichimoku Kinko Hyo.
While surprisingly, the Stochastic indicator gives the worst profit with a negative number, -20,716.40 or -20.72%, with a drawdown of 30.64%, somewhat lower than the RSI drawdown of 34.57%. While other indicators have an average drawdown ranging between 20-30%.
But does this mean Ichimoku is the best indicator and others are useless? Actually that does not mean so.
Think about it in one battle, it has a different arena, and similar to the indicators included in the toolbox have different functions. So that all conditions on the battlefield will not be solved using only one weapon.
Strategies in Forex too, by understanding the battlefield it will adjust which weapons should be chosen to use, to win.
So what are the best indicators for day trading? The results of backtesting over the past five years are not a guarantee that it will give the same results in the future. This is due to many factors, one of which is the dynamics of the economic conditions of a country, say in the example above, choose the EURUSD pair.
And the economic conditions of European and American countries over the past five years are certainly different from the next five years. So that the best indicators today are not guaranteed to give the same results for the next five years even with the same pair, the same total lot, and the same starter balance.
Therefore many professional traders suggest the importance of risk management in real trading, with a maximum risk limit of 5% for each trading plan, and some even recommend less than that number.
Maybe when you open a position on a demo account, it will not put psychological pressure due to loss in the demo account, it doesn’t matter because if you can’t even make a profit.