Now for the important part: how profitable is each technical indicator on its own?
After all, forex traders don’t use technical indicators to make their charts appear better. Traders are in the money-making industry!
If these indicators produce indications that do not result in a lucrative bottom line over time, they are just not the way to go for your requirements.

To provide you with a comparison of the usefulness of each technical indicator, we chose to backtest each indicator separately for the past 5 years.
Backtesting entails testing the parameters of the indicators against previous price behavior in the past.
In your future studies, you will discover more about this. For the time being, consider the parameters we utilized for our backtest.
INDICATOR | PARAMETERS | RULES |
---|---|---|
Bollinger Bands | (30,2,2) | Cover and go long when the daily closing price crosses below the lower band. Cover and go short when the daily closing price crosses above the upper band. |
MACD | (12,26,9) | Cover and go long when MACD1 (fast) crosses above MACD2 (slow). Cover and go short when MACD1 crosses below MACD2. |
Parabolic SAR | (.02,.02,.2) | Cover and go long when the daily closing price crosses above ParSAR. Cover and go short when the daily closing price crosses below ParSAR. |
Stochastic | (14,3,3) | Cover and go long when Stoch % crosses above 20. Cover and go short when Stoch % crosses below 80. |
RSI | (9) | Cover and go long when RSI crosses above 30. Cover and go short when RSI crosses below 70 |
Ichimoku Kinko Hyo | (9,26,52,1) | Cover and go long when the conversion line crosses above baseline. Cover and go short when conversion line crosses below base line |
We tested each of the technical indicators individually on the daily time frame of EUR/USD for the last 5 years using these criteria.
We trade one lot (100,000 units) at a time with no predefined stop losses or take profits.
When a new signal comes, we simply conceal and move positions. This means that if we were initially long and the signal instructed us to sell, we would cover and open a new short position.
Also, we assumed we were well financed (as advised in our Leverage lesson) and began with a $100,000 notional balance.
We included total pips gained/lost and the maximum drawdown in addition to the actual profit and loss of each strategy.
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:
STRATEGY | NUMBER OF TRADES | P/L IN PIPS | P/L IN % | MAX DRAWDOWN |
---|---|---|---|---|
Buy And Hold | 1 | -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 | 8 | -18,716.69 | -18.72 | 34.57 |
Ichimoku Kinko Hyo | 53 | 30,341.22 | 30.34 | 19.51 |
According to the data, the Ichimoku Kinko Hyo indicator did the best on its own over the last five years.
It made a total profit of $30,341 (30.35%). Over the course of five years, that equates to an annual increase of slightly more than 6%!
Surprisingly, the remaining technical indicators were significantly less profitable, with the Stochastic indicator returning a negative 20.72%.
Furthermore, all of the indicators resulted in significant drawdowns ranging from 20% to 30%.
This is not to say that the Ichimoku Kinko Hyo indicator is the best or that technical indicators in general are worthless. Rather, this demonstrates that they aren’t really useful on their own.
It is an art, and as traders, we must learn how to use and combine the instruments at our disposal in order to devise a method that works for us.