There are different traders in the game with their own strategies. Every one of them has his or her own view on trading indicators. Some believe that it is not possible to outperform the competitors by relying on a single indicator. Others combine different indicators, as one is not enough to predict the price of an asset. Some traders do not use any: because they don't have time to test them all and to choose which fits their trading style the best. But really, is there the "one", the most profitable Forex indicator known to mankind?
There is one universal and multifaceted indicator, Ichimoku Kinko Hyo, which originates from Japan and is particularly good at identifying trends and predicting the potential price. In fact, it is deemed the most profitable Forex indicator among the rest. When a 5-year backtesting was performed with the EUR/USD pair on its daily chart, ichimoku scored the greatest returns and smallest percent of losses. It proved to work best than some of the most used indicators, such as Bollinger bands, RSI, Stochastic, Parabolic SAR, and especially MACD.
Let us explore Ichimoku Kinko Hyo in more detail.
When searching for the most profitable indicator, you should bear in mind that there are two basic types of those, oscillators and trend followers. The first group of indicators help to determine when the asset is overbought and, therefore, to predict the future price. They rely on data obtained with trend indicators, the ones that measures how strong a particular trend is. Oscillators are used more commonly, mainly in markets where the ranges can be well observed, while trend indicators are really useful in markets with clearly detectable trends. It might sound easy, but in reality, the hardest part is to determine the type of market you are dealing with in advance.
Just like the river, a market never stays the same; it is variable and highly responsive to a vast number of factors. Under such changeable conditions, a trader would be required to change the parameters constantly and adapt to the current market situation. Apart from that, any action that the trader takes follows a signal from an indicator which should be confirmed. There is a lot of waiting, and those who are involved with Forex trading can rarely afford this luxury. This places the efficiency of all indicators in doubt. Still, there must be some way out.
It is quite possible that we find it in Japan. That's the country which invented the widely used candlesticks two centuries before the Wall Street emerged. The country where 5% of all people are traders (that is 1/20 of the population). Besides, 1/3 of the world's Forex trade flow comes from Japan. It's enough to look at the size of the country and compare it to others. Now, the three facts above look even more impressive than they did before.
If we look at the trading indicators available, we can see a Japanese name, Ichimoku Kinko Hyo, or simply Ichimoku. It might be that we've found the right tool. So, let us see why Ichimoku belongs to profitable Forex indicators and what there is so special about it.
Japan is a mysterious country with people having an alternative view at everything that happens in the world. Harmony and balance are the central ideas of a traditional Japanese lifestyle, and it is felt everywhere, even when it comes to trading. This is why the translation of Ichimoku Kinko Hyo is something close to "first-glance equilibrium chart". Here, the equilibrium refers to the balance of two main market forces, demand and supply. Accordingly, this is the central point of the indicator. What's curious, this simple idea makes the Ichimoku indicator one the most powerful and most profitable among Forex indicators.
The Ichimoku story
The method which we know now under the name of Ichimoku was developed by Goichi Hosoda, a Japanese journalist who was interested in the commodity market back in 1930s. As he was following the rice price and analysing its behavior, he learned to prognose them using candlesticks. After 30 years of research, Ichimoku Sanjin (which was Goichi's pseudonym) published his observations and presented his newly-discovered method in the 60s.
So what are the principles at the core of potentially the most profitable Forex indicator? How is it different from every other trading indicator? What do the equilibrium has to do with this? For a start, let us mention that Ichimoku's uniqueness lies in its ability to make prognoses of the price movement, while other indicators mainly calculate it.
Ichimoku Kinko Hyo is more than an indicator. It is a trend-based system that relies on candlesticks for collecting information and analysing it. Ichimoku consists of 5 lines which resemble a moving average used in other methods, but the only difference is that the closing price is missing here; it is substituted by the average price. Through years of backtesting, all of which was done manually by him and his students, Goichi Hosoda found out that it's better to rely on average price-based moving averages when looking for the price balance.
So, what is it exactly, the price balance or equilibrium?
We are talking about the balance between the two main market concepts, supply and demand. When the sellers and buyers operate the same volumes of assets, the price stabilizes at some level. This is where the equilibrium comes from.
It all works as a pendulum: it swings back and forth trying to reach the equilibrium position. When the buyers come into the market, they start to buy until a moment comes when they stop at some point, and the demand drops. Then, their place gets taken by sellers who create excessive supply, and it decreases the price. The latter regains its balance after sellers have their orders filled moving aside for the buyers again. This is normally what constitutes the price levels.
We have somehow touched the concepts of support and resistance, the positions at which the fall or rise of the price stops, accordingly. The Ichimoku method has reclaimed its spot on the top of the Forex indicator foodchain because it has the capability to foresee these support and resistance levels even before they were established.
The first two lines look just like the slightly upgraded moving averages. Tenkan-sen, the turning line, is the first line which is the average between the highest and the lowest points of the last 9 periods. It signals the market trend and indicates the time when the price equilibrium was disrupted.
Kijun-sen, the confirmation line, the average between the price high and low over the last 26 periods. Its position in regard to the price mainly predicts the future price movement.
The two following components in the Ichimoku ecosystem are the 3rd and 4th lines, Senkou Span A and B. Together, they form the two edges of the cloud (Kumo).
Senkou Span A is calculated as the average of Tenkan-sen and Kijun-sen for the future 26 periods, and Senkou Span B is the calculation of the price average over the past 52 periods and projected 26 periods ahead. All that is between them, is called the cloud. It is moved 26 periods ahead on the chart and designates an area where trading will be unadvisable: it is the area of the price balance. The price beyond the cloud can move up or down; its edge inclination can help to point that out. Kumo is where the traders should prepare to buy or sell.
Chikou Span is the fifth line of the Ichimoku system. Traders call it the lagging span, as it is basically the current period's price projected 26 periods back. It is used to compare the prices of the two points 26 periods apart and indicates the type of the current market — trending or ranging. Its position in regard to the past price helps to predict whether it's best to buy or sell.
For traders who use Ichimoku Kinko Hyo, it is enough to have an instant look at the chart, just like its name suggests, to be able to get the most accurate predictions of the price's behavior. The Ichimoku method is incredibly versatile, as it gives a trader a number of ways to benefit with its help. As an indicator, it does the following:
1) Determines the market trend's direction and strength and signals the time perfect for making an entry.
2) Determines the areas of the price equilibrium, which allows the traders to see when exactly he or she needs to make an exit.
3) Determines the type of the market, whether it is ranging or trading.
The information above comes very easily to a trader thanks to the most profitable Forex indicator known to mankind, Ichimoku Kinko Hyo. Besides, it works in all types of markets and can be used for periods of any length (however, it is advisable to rely on longer terms, for the clearer picture on the chart). Goichi Hosoda was relying on daily candlesticks, which is why many traders regard Tenkan-sen as a 1.5-week average, Kijun, Senkou Span A, and Chikou Span as monthly indicators, and Senkou Span B as a 2-months average.
The Ichimoku system has a number of applications by multiple traders. It can help to make a quick decision on the entry or exit, or it can become a perfect assistant in building an entire long-term strategy. In fact, Ichimoku is big enough for everyone to develop their unique trading strategy and profit from it. The fact that it relies on the simple and basic trading concepts makes it more reliable and, therefore, powerful.