How Profitable Are Technical Indicators on Their Own?
At the end of the day, forex traders don’t use technical indicators just to make their charts look pretty—they want to make money!
If an indicator’s signals don’t translate into consistent profits over time, it simply won’t meet your trading needs.
To give you a fair comparison of how effective each indicator is, we backtested them individually over the past five years.
Backtesting means testing an indicator’s settings against historical price data to see how well it would have performed.
You’ll learn more about backtesting later, but for now, here are the parameters we used for each indicator:
|
Indicator |
Parameters |
Trading Rules |
|
Bollinger Bands |
(30, 2, 2) |
Go long when the daily close crosses below the lower band; go short when it crosses above the upper band. |
|
MACD |
(12, 26, 9) |
Go long when the fast MACD line crosses above the slow line; go short when it crosses below. |
|
Parabolic SAR |
(.02, .02, .2) |
Go long when price crosses above Parabolic SAR; go short when it crosses below. |
|
Stochastic |
(14, 3, 3) |
Go long when %K crosses above 20; go short when it crosses below 80. |
|
RSI |
(9) |
Go long when RSI crosses above 30; go short when it crosses below 70. |
|
Ichimoku Kinko Hyo |
(9, 26, 52, 1) |
Go long when the conversion line crosses above the baseline; go short when it crosses below. |
Using these rules, we tested each indicator on the daily EUR/USD chart over the last five years.
We traded 1 standard lot (100,000 units) per trade with no fixed stop losses or take profit levels.
When a new signal appeared, we closed (covered) the previous position and switched to the new one. For example, if we were long and received a sell signal, we closed the long trade and entered a short position.
We started with a hypothetical capital of $100,000 and assumed ample leverage, as discussed in our Leverage lesson.
Besides profits and losses, we also recorded total pips gained or lost and the maximum drawdown for each strategy.
Important: We do not recommend trading without stop losses—this was purely for illustrative purposes.
Here are the backtest results:
|
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 |
The data reveals that, over five years, the Ichimoku Kinko Hyo indicator was the most profitable on its own, delivering a total profit of over $30,000, or roughly 30.35%. That’s about a 6% annual return on average.
Surprisingly, most of the other indicators showed negative returns, with the Stochastic performing the worst at -20.72%.
Additionally, every strategy experienced significant drawdowns between 20% and 30%.
Does this mean Ichimoku is the best or that technical indicators don’t work?
Not at all.
Rather, it shows that relying on any single indicator alone is rarely enough.
Think back to those martial arts movies—you don’t win by using just one move. Even The Rock combined different moves to beat the bad guys.
Forex trading is similar—it’s an art.
As traders, we need to learn how to blend different tools and indicators to create a system that suits us.
And that leads us perfectly into our next lesson: how to combine these indicators for better results!