OPTIMIZING YOUR USE OF INDICATORS

The developers of indicators offer default settings that are intended to be general in their
use. However, the settings can be altered. Many traders try to alter the settings without
a real understanding of the basis of the alteration. Simple changes, such as increasing
or reducing the periods used, aren’t particularly controversial. Generally, traders use
the default settings on the indicators. These defaults are there because a shorter period
makes the indicators more sensitive to price changes, while a longer period smooths
out the indicator and increases its robustness. But the question arises as to what is the
optimum setting. For example, is 5, 3, 3 on the slow stochastic a better fit to the data than
the default 14, 3, 3? It is possible to answer that question if an optimization program or
back-testing program was available.
Many platforms and charting services provide an ability to optimize the settings. The
first step in optimizing an indictor setting is to identify the time frame for the optimization.
A period of price action too far back runs the risk of the trader’s optimizing against
conditions that are no longer there. Geopolitical and economic conditions change frequently,
particularly in forex. This means that the period of optimization should be perhaps
very recent, such as the one to three months. Also important is a selection of which
candle chart to optimize. Will it be trading off day candles or shorter ones such as the
15-minute candle? Additional challenges face traders using optimizing approaches. A key
factor is the stop loss. Even after settings are optimized for gaining the most profits from
a trading period, the use of stops and limits will ultimately affect the results.
Once you have developed a trading idea, back-testing is the next step before turning
your idea into real, live trades. While paper trading with a demo or game account is
highly recommended for getting used to the real-time nature of markets, back-testing
can save you an incredible amount of time. By definition, back-testing is a simulation of
what would happen if you had traded your ideas in the past. You can test a day’s worth
of trades up to many years, going back as far as there was a market for the instrument
you are trading.




By ABE COFNAS