Welcome to Forex Backtest Friday.
In the previous post, I tested the Ichimoku Kinko Hyo indicator and found it to be reasonably effective on a few currency pairs.
To recap, here are the results for the GBP/JPY (including spread costs) over the past 11 years:
- 1 hour chart: 79.7% gain
- 4 hour chart: 51.9% gain
Having established a base level of profitability, the next step is to be a little more discerning about the trades being taken.
One of the suggestions in the comments section was to add a Kumo qualifier, where a buy trade is only taken above the Ichimoku cloud, and a sell trade is only taken below (thanks Zippy Bronstein!).
- Purple circle: Tenkan Sen crosses Kijun Sen
- Blue straight line: Buy trade open-to-close
- Red straight line: Sell trade open-to-close
So I put this to the test, and the result was... well, I'll let you see for yourself!
Here are the results of the backtest (click to view):
And here's the summary of the new results, compared with the original:
When applying the Kumo (Cloud) qualifier, there were 56% fewer trades taken across both timeframes. That's a big reduction!
And the result was a substantial improvement on the 1 hour chart and, interestingly, not on the 4 hour chart.
So it looks like - for the most part - the Kumo cloud is indeed an important aspect of the Ichimoku Kinko Hyo.
So what next?
There's just one more thing left to do.
Recall that in the first Ichimoku backtest I was using a fixed lot size of 1 mini lot per trade.
Now, I can start scaling the lot size based on the account capital. As the account gets larger, I want to be trading with a proportionately larger lot size (and vice versa as the account gets smaller).
To keep things simple, I'll start with 1x effective/actual leverage.
And here are the results (click to view):