Binary options: the best settings for trading indicators
@DavidTraderSignalsBefore discussing the best settings for trading indicators, we need to repeat an important principle of trading indicators.
Trading indicators are an important principle
Smaller settings lead to more sensitive trading indicators that produce more signals. However, smaller settings make the trading indicator less reliable.
Larger settings give us more reliable, but less frequent signals. And indicators with large settings are lagging.
It seems that there is a range of settings for indicators. On the one hand, they are sensitive, but unreliable. On the other hand, they are reliable, but lagging. So where is the ideal indicator setting — somewhere in the middle?
Yes. But the perfect setting is not available in real time. It is only available in back-testing.
Fortunately, we don't need perfection to be successful in trading.
How do I choose the optimal settings for trading indicators?
1.Start with the default indicator settings
Always start with the default setting for trading indicators. This is very important when you are trying to learn a new indicator.
The default settings are what the inventor of the indicator used. Default settings are also the most common among traders. Therefore, most training resources, including trading examples, use default settings.
The default settings for some common indicators are listed below.
•14-period Relative Strength Index (RSI)
•20-period Commodity Channel Index (CCI)
•14-period stochastic oscillator
•20-period Bollinger bands (with 2 bands of standard deviations)
•12, 26, 9 periods for convergence-divergence of moving averages (MACD)
If you are satisfied with the default settings, then there is no point in interfering with them. Unless you understand how the indicator works and you don't know what you want.
2.Think about what you want to do with your trading indicator
If you know what your indicator should do, you can apply the principle described above to adjust the indicator parameters.
For trading triggers, smaller settings work because they are not delayed and are able to accurately identify trading inputs. For example, using prices closing above the 3-period simple moving average as a long trading trigger is reasonable for a short-term moving average. The 2-period ADX is another example of adapting the indicator as a trading entry.
However, using a 3-period moving average to determine a market trend is a joke. The average value of the last 3 prices hardly reflects the market trend. A longer-term moving average is more suitable for assessing a market trend. 50-period and 200-period moving averages are usually used as long-term trend filters.
As the indicator period increases, you can even use oscillators to search for a market trend. I use a 100-period CCI to check trends on daily charts.
3.Experiment with different indicator settings
If you think that the indicator is not doing its job properly with the default settings, you can experiment with other settings and see how the indicator behaves.
Don't worry about the difference between a 20-period indicator and a 21-period indicator. To help you choose the parameters for your experiment, you can use Fibonacci numbers, which are commonly used in trading. Some of the common options are — 3, 8, 21, 55, 144 and 233.
Experiment with indicator settings that suit your trading style and goals, and then stick to them. Do not change the settings regularly and do not blame the indicator settings for poor trading performance.
4.Conclusion: trader and trading tools
Ultimately, the optimal settings for trading indicators depend on your understanding of the indicator, the purpose of its use, and yourself.
Do you know how to use the indicator? If you do not know how to use the indicator and interpret it correctly, then the indicator setting does not matter.
Focus on learning how to use the indicator, rather than hunting for the elusive perfect setting. Constantly working with the settings will only overshadow your learning path.