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Thank you, David, for what is probably the
best explanation I've read on the subject of 'newbies' using
indicators.
Too often the answer (not just from this list) is -
read books for the next six months and then work out what works for you
- mostly with the best of intentions..
There has to be a starting point, which I assume is
the defaults set in each program, of what the author believes would get the
newbie 'on the road'. As skills and knowledge increase, the capacity to
'spread the wings' away from such 'defaults' enables one to fine-tune
their (developing) techniques.
Again, thanks David.
Steve L
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----- Original Message -----
Sent: Saturday, December 04, 2004 6:59
PM
Subject: [bestcharts] Re: Please clarify
Bestcharts
For what my opinion is worth, I agree totally with
Rik.
The best that any charting tool can do is use past history to
generate buy and sell signals. BC goes further than many in that it
also gives back-testing and AIO facilities. It is very reasonably
priced compared to the likes of MetaStock, AmiBroker, TradeStation,
etc.
To answer the question `do you need to change the default
parameters?', I will use RSI as an example. Most traders that I know
simply use the default settings supplied by their charting package,
unquestioningly. For RSI that value is 14, and I notice that it is
also the `factory' default in BC. BC's highly automated AIO function
offers incentive to move from default to optimized parameters.
Many
traders use oscillators like RSI, to highlight
oversold/overbought
situations, and also divergences. You can of
course use BC's RSI plots to
(manually) look for these, just as you
would with any other package. But
BC also uses RSI to generate
buy/sell signals when RSI crosses a MA of
itself, which is a novel
idea.
I have used RSI as an example, but
the other indicators work
similarly. I will compare some of BC's factory
defaults with those of
MetaStock (where appropriate):
BB: both BC
and MS default to a MA of 20 (with 2 std deviations)
MACD: BC uses the
industry standards of 12, 26,9; MS uses a non-
standard system.
SO: BC
uses 5 and 5; MetaStock uses 5 and 3.
RSI: both BC and MS default to
14.
CCI: BC defaults to 15, MS to 14.
DMI: both BC and MS default to
14.
ROC: BC defaults to 10, MS to 5.
WMS: BC defaults to 10,-80,-20; MS
to 14,-80,-20.
PPO: BC uses 5,12; MS to 9,25.
MFI: both BC and MS
default to 14.
Of course, it is easy enough to change the default
settings in either
product.
There is no `holy grail' set of
parameters, because different stocks
move in constantly changing cycles.
That is what AIO is attempting to
capture, by using the technique of
profitability back-testing.
Back-testing over too small a statistical
sample can occasionally be
meaningless. For example, across a short time
period there might be
one short, sharp price movement that accounts for a
disproportionally
huge gain. A certain parameter setting might catch this
price
movement early enough, while another might generate the buy signal a
day or two too late, causing the profit to be missed. That is part of
the fickle nature of TA.
You can set parameters to generate either
earlier or later entry /
exit signals. Earlier ones (before a reversal has
firmly established
itself) will catch greater profits when they do work,
but will also
fail more frequently because they are more likely to pick up
`noise'
along the prevailing trend. Later entries and exits will tend to
generate lower profit trades, but will be more consistently
successful. That is a finely judged balance.
In any trade, you will
make money if and only if the price trends far
enough between the entry
and exit to cover your costs. If the trend
reverses too quickly, even high
probability entries and exits can
result in a loss. That is not the fault
of the buy / sell signals,
the indicators or parameters used, or the
charting package. You can
use the likes of trend lines, previous
support/resistance, or
Fibonacci retracements, to try to guess how far
prices will move, but
the key word is `guess'. News can cause unexpected
or chaotic short
term price movement that can undo even the most
conscientiously
applied TA. The best you can do is use a combination of
techniques to
move the probabilities as far as possible in your favor (and
then
size your positions conservatively enough to ride out any temporary
run of losses).
Finally, buy / sell signals are but the tip of the
trading iceberg.
Whether you ultimately profit is determined by a number
of other
factors, that are not directly addressed by many charting
packages,
e.g.
 How do you manage risk, and exit losing
positions (e.g. stop
losses)?
 How do you select which
stocks to trade?
 Do you check for confirmation in longer term
trends, news,
fundamentals, director dealings, sector rotations,
correlation with
other stocks in the same industry, general market
direction?
 Do you pyramid your positions, or take profits as
the trade
progresses?
 How do you size your positions,
relative to your total capital?
 How diversified is your
trading, i.e. how many simultaneous
positions to you manage, and how
correlated are they?
 Do you have a trading plan, and how well
enough disciplined are you
to adhere to it?
 How do you
cope psychologically with losses?
 How much time do you put in
researching the markets?
 Do you trade short positions as well
as long?
 Do you hedge long and short positions against each
other?
Regards
David
--- In [EMAIL PROTECTED], "Rik
Rasmussen" <[EMAIL PROTECTED]>
wrote:
> I believe I did answer
his question.
>
> The default parameters may be very satisfactory
for some users.
Others may
> choose to change the
parameters.
>
> I can not tell anyone if they should change them
or not. They have
to decide
> that, based on sufficient
understanding of the indicators and
parameters to
> make that
decision.
>
> None of this is unique to Best Charts, this is all
Technical
Analysis 101
> stuff. it is not the purpose of this group
to teach basic technical
> analysis. There are hundreds of free web
sites that already do that
better
> than we could do it
here.
>
> Rik Rasmussen
> Best Charts Yahoo Group
Moderator
> http://groups.yahoo.com/group/bestcharts/
>
>
>
> > -----Original Message-----
> > From:
slimhart98 [mailto:[EMAIL PROTECTED]
> > Sent: Friday, December 03, 2004
11:59 AM
> > To: [EMAIL PROTECTED]
> > Subject:
[bestcharts] Re: Please clarify Bestcharts
> >
> >
>
>
> >
> >
> > Ric:
> >
> > I
think that you failed to answer Mr. Thompson's question as to
> >
whether or not the default parameters of BC require substantial
> >
modification.
> >
> >
Slimhart
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