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What's the best way to choose technical indicator parameters and timeframes?

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Technical indicators are tools that help traders analyze price movements, trends, patterns, and signals in the market. They can be based on different types of data, such as price, volume, momentum, volatility, or sentiment. However, not all technical indicators are created equal, and choosing the right ones for your trading style, objectives, and risk tolerance can be challenging. Moreover, you also need to consider the parameters and timeframes that suit your indicators and your market conditions. In this article, we will discuss some tips and best practices on how to choose technical indicator parameters and timeframes for your trading strategy.

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CA Piyali Parashari

Chartered Accountant @ Investment Beta | Financial Advisory and Education

1 What are parameters and timeframes?

Parameters are the settings or inputs that define how a technical indicator is calculated and displayed on a chart. For example, a moving average (MA) indicator has a parameter that determines how many periods of price data are used to calculate the average. A stochastic oscillator indicator has parameters that control the sensitivity and smoothness of the indicator. Changing the parameters can affect the appearance, responsiveness, and accuracy of the indicator.

Timeframes are the intervals of time that are used to display the price data and the indicator on a chart. For example, a daily chart shows one candlestick or bar for each day of trading, while a 15-minute chart shows one candlestick or bar for every 15 minutes of trading. Different timeframes can reveal different patterns, trends, and signals in the market. Choosing the right timeframe can depend on your trading style, goals, and risk appetite.

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CA Piyali Parashari

Chartered Accountant @ Investment Beta | Financial Advisory and Education
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A parameter indicates the number of data points eg number of bars. There are no fixed set of parameters which works in all charts. The smaller the parameter, the faster the indicator will generate signals, including false signals. The optimum choice depends on the volatility of stock prices. It is a trade-off between minimizing false signals and maximizing correct signals. For eg An EMA(5) will be faster in giving signals than the EMA (10) since it considers price averages of 5 data points only vs the 10 data points of the latter. The timeframe depends on the type of trade eg intraday, swing trade. Higher timeframe gives better signals, as market noise and volatility are filtered out. Eg. Weekly timeframe shows the long term trend better.

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2 How to choose parameters for technical indicators?

Choosing the best parameters for technical indicators is not a straightforward process, as different indicators may have different optimal settings based on the market, timeframe, and trader preferences. However, there are some general guidelines and principles that can help you find the parameters that work for you. Start with the default settings as a baseline, then use backtesting and optimization tools to compare different parameter settings. Additionally, it's important to be aware of overfitting and curve-fitting when selecting parameters - these can occur when using too many parameters, complex indicators, or short timeframes. To avoid these issues, use a robust and simple indicator, a longer timeframe, validation data, and a realistic objective function.

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CA Piyali Parashari

Chartered Accountant @ Investment Beta | Financial Advisory and Education
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The choice of parameters is a trade-off between minimizing false signals and maximizing the correct signals. One can work with the default setting of the parameters first and backtest the same to see how well correct signals were generated in the past. If results are not favorable the parameters might be changed, one at a time, until the desired back test results are achieved. Its important to be simple in technical analysis and avoid using too many parameters or complex settings as it may lead to conflicting signals and decision paralysis. Try and test the parameters over different time frames to check how well it is generating signals. Eg In RSI indicator the default is 70-30 but you can change to 60-40 also to check the signals generated

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3 How to choose timeframes for technical indicators?

Choosing the right timeframe for technical indicators is an important factor for successful trading. It can depend on various factors, such as the market, the indicator, and the trader's style. To help you decide, there are some general tips and best practices to consider. Firstly, align your timeframe with your trading style and objectives; scalpers may use shorter timeframes, while swing traders may use longer ones. Secondly, use multiple timeframes for confirmation and context; this way, you can increase accuracy in your trading decisions. Lastly, consider the volatility and liquidity of the market; choose a timeframe that reflects its conditions and allows you to capture relevant price changes. Regularly test and evaluate your choices, and adapt them as needed.

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CA Piyali Parashari

Chartered Accountant @ Investment Beta | Financial Advisory and Education
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Understanding your trading mentality and style is the FIRST step. What type of trade you are comfortable with? -scalping, intraday, swing, Scalpers may use the 5 min chart, Intraday trader may use the 5 and 15 minutes chart, Swing trader may use the daily, weekly chart. A 5 min chart has a greater volatility than an Hourly chart. Check if you have a right mindset to handle the volatility. In any trading style its important to check charts in at least 2 or 3 timeframes as the trends are clearer in the higher timeframe vs the smaller timeframe. A weekly timeframe will smoothen the volatility better than a daily or hourly one. KNOWING YOURSELF and the level of volatility you can handle is the first step for proper selection of timeframe.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What's the best way to choose technical indicator parameters and timeframes?

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1 What are parameters and timeframes?

2 How to choose parameters for technical indicators?

3 How to choose timeframes for technical indicators?

4 Here’s what else to consider

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What's the best way to choose technical indicator parameters and timeframes?

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1 What are parameters and timeframes?

2 How to choose parameters for technical indicators?

3 How to choose timeframes for technical indicators?

4 Here’s what else to consider

Technical Analysis

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