How to use time periods for various indicators?

[pirx]

Hello!

I´m relatively new to TA, so I have still some questions, on which I did not find answers yet. I hope you can help me with that

Let´s say I want to use EMA, RSI and Momentum. The "default" time values for these indicators are 13 for EMA, 14 for RSI and 7 for Momentum.

According to dr. Alexander Elder (Trading For a Living), a rule of thumb is, when not sure about the signals, to lengthen the trend following indicators and shorten the oscillators.

I know that everyone should find the best values for his own trading system, but I wondered, if it would make sense, if one would use the same time values for all indicators? For example 13 days for EMA, 13 days for RSI and 13 days for Momentum.

Does anyone practise this and would it make any sense?

I hope I´m not too much trouble Thanks!

Henrik

 

[DaveJB]

Defaults are as good as any others, although some swear by optimised values and so forth.... personally I think that's hogwash, but it's a darn good way to apparently add value to a charting program. It's certainly arguable that IF you could discern some regular periodicity in a market then you could doubtless pick 'the right' indicator value for that market, but markets change over time so what's right today won't - in all likelihood - be right a month from now. Whenever I feel inclined to use an indicator I seldom see any reason to stray from the accepted default values - for many you can experiment, see how the display changes as different periods are input... it's quite surprising at times to see how little real change a fairly large adjustment in period causes.

 

[Jack o'Clubs]

Defaults are as good as any others, although some swear by optimised values and so forth.... personally I think that's hogwash, but it's a darn good way to apparently add value to a charting program. It's certainly arguable that IF you could discern some regular periodicity in a market then you could doubtless pick 'the right' indicator value for that market, but markets change over time so what's right today won't - in all likelihood - be right a month from now. Whenever I feel inclined to use an indicator I seldom see any reason to stray from the accepted default values - for many you can experiment, see how the display changes as different periods are input... it's quite surprising at times to see how little real change a fairly large adjustment in period causes.

From your post Dave, it sounds like you're relatively sceptical on indicators. I use them - I know that's a bit unfashionable, but it seems to work for me, and I also optimise them. I would always want to know where the default values have come from: often from the guy who invented or published academic research on the indicator. That might suit his trading style, but not mine. As long as I understand what the indicator is trying to tell me and what its limitations are, then I have no problem changing the parameters if it seems to give me better results.

E.g. I like MACD. I intuitively understand what it's trying to do, and how it works. I know the circumstances in which it won't work well. Some time ago I thought of a strategy of buying investment trusts that were trading on large discounts to their NAV, using a technical indicator to trigger the trade - MACD should work well in that circumstance. Yet MACD on the standard 12/26/9 values produced far too many whipsaws and never made money. Lenthening the trend to 25/65/18 has been a winner for me for many years now. I guess the key is that if 25/65/18 stopped working for any reason, rather than keep plugging on blindly because it used to work in the past, I would look to reassess it, understand why it wasn't working and either change it or ditch it.

Obviously everyone will have different styles, but I see little reason for not optimising techniques you like, if it seems to work and as long as its not overdone.

I know this doesn't directly answer your question Henrik, but why not experiment with your suggestion and see if it works with your trading style and preferred securities?

 

[DaveJB]

Damn!
Don't buy Logitech mice - they have a stupid little mini button near the mouse buttons that wipes the typing you just spent 10 mins on...! <grrrrr>
Sorry - yes, skeptical. I'm not diametrically opposed to indicator use, I tend to put the odd MA onscreen while trading and find it informative when that is touched or breached, but I am opposed to over reliance on them.

As you are aware there are conditions when an indicator isn't going to work - an MA crossover when the market is rangebound is going to whipsaw, for a simple example. Indicator's are okay for providing a quick guide to the state of the share/instrument, but you have to be aware of the market conditions your chosen indicator is useable in or you'll get hammered. Too many system sellers will avoid explaining this, and simply bolt ADX on to deal with trending/trading issues - I'd argue that by the time you know enough about the market you are trading to make proper use of the chosen indicators you probably don't need to worry about what settings you are going to use.

If optimising worked 'out of the box' then Omnitrader customers would now own all the shares, yes? I'm pleased you found settings that help you make money.

 

[pirx]

Hello, guys! Thanks for your answers, I apprechiate your views on this topic. I´m sorry that I´m a bit late.

it's quite surprising at times to see how little real change a fairly large adjustment in period causes.

Dave, this is exactly what dr. Elder emphasizes - that the best indicators are pretty much imune to larger adjustments and those are the ones which he recommends to use.

Obviously everyone will have different styles, but I see little reason for not optimising techniques you like, if it seems to work and as long as its not overdone.

I know this doesn't directly answer your question Henrik, but why not experiment with your suggestion and see if it works with your trading style and preferred securities?

Yeah, overdoing in "optimizing" can lead you to see what you want to see I´ll try to avoid doing this mistake.

Anyway, I will just take your suggestion and try to fiddle around a bit more with time values to see what happens - but for the real thing I´ll still use the default values at this time. I never used to have positions in more that 3 stocks so this little expetiment should give me quick answers if optimizing would suit to my style of trading.

Thanks again and I wish you both a good luck!

 

[garethb]

You can use the more common indicators is as a window onto what a significant number of other traders are seeing and perhaps thinking and it goes back to the self fulfilling nature of some indicators. For example many traders use 20 and/or 50 period moving averages either as places to enter trades or to place their stops. This information can be used in conjunction with other analysis to add to the overall picture of where action may take place. Rather than seeing them as self fulfilling and trading blindly on the indicators you can decide whether to trade with the crowd or to wait for the crowd to get screwed before entering your trade. When using indicators in this way you need to use the popular values. The 50 period simple moving average of the daily chart is far more likely to indicate an area for crowd action than the 73 period average of the 69 minute chart which few will be watching.

 

[pirx]

The 50 period simple moving average of the daily chart is far more likely to indicate an area for crowd action than the 73 period average of the 69 minute chart which few will be watching.

That came to my mind, yes. I was thinking to use a few widely used indicators with default values and some not so common ones, which could be customised.

I decided to go for the "5 bullet" approach by dr. Elder. It really makes sense to use less indicators but to learn them in greater detail. These are the ones that I want to use: EMA, Channels, MACD Histogram, Elder-ray and Force Index.

 

[Charlton]

That came to my mind, yes. I was thinking to use a few widely used indicators with default values and some not so common ones, which could be customised.

I decided to go for the "5 bullet" approach by dr. Elder. It really makes sense to use less indicators but to learn them in greater detail. These are the ones that I want to use: EMA, Channels, MACD Histogram, Elder-ray and Force Index.

Pirx
I also have Elder's book which I think is excellent. Another interesting book which looks at various techniques by various contributors is "What works in online trading - edited by Mark Etzkorn ISBN 0-471-37288-9.

Many on this site use indicators sparingly, because they are one level removed from the price and volume themselves. Many like to use patterns, trendlines etc or Level 2. The important thing that Elder stresses with them is:

• 
  Distinguish between trend-following and oscillators
  Determine which are appropriate for your style of trading/market conditions
  Compare indicators on different time-scales e.g. a trend indicator in the short-term may show the complete opposite to one in the longer term
  Understand what they are really saying and how they work

To understand them requires examination of the underlying price bars, patterns and volumes.. It also requires an understanding of the pschology of the market and how certain market makers manipulate it to create false signals.

I would also challenge you to compare the basic charts to the indicator signals. Look at the prices and volumes without using indicators. How do you interpret them ? Look at correlations between volumes and price (if any) e.g. just before/after a breakout, a reversal, resistance and support levels. tIf possible do this by running the chart up to a particular point in time and asking yourself what happens next.

Add the indicators and ask yourself have they added anything to your interpretation. Do they indicate what happens next BEFORE you could have worked it out without them ? What is the relationship between the indicators and price or volume ?

Good luck with the research

Charlton

 

[pirx]

Hello Charlton,

thanks for the tips! This kind of analysis is a very good starting point and for now I´m staying with the basics - it´s a fine way to build a solid groundwork for further research.

Henrik