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If you have ever used technical indicators for trading, you know that their settings can sometimes be confusing. The most common question that traders have about the indicators is which configurations they should use in order for the indicators to work well for them. But how to choose indicator settings? Is there such a thing as the perfect settings for indicators? The answer is both yes and no. 

Let’s have a look at the main principles to consider when picking indicators and choosing their settings. First, we will talk about the difference between indicators and the way they work. Then, we will proceed to indicator settings and discuss what the optimal configurations might be.

Indicator types

Before deciding on the settings for your indicator, you need to understand what the indicator is supposed to do for you. What’s the “special power” of the indicator that you are about to use, does it suit your needs? 

All indicators are split into several categories. Momentum indicators, like the Awesome Oscillator or MACD, assist in finding rapid price movements and might indicate a potential price reversal. Trend indicators help display the direction of the trend, filtering out the price noise. The most well-known indicators of this type are the Moving Average, KDJ and Ichimoku. 

Volatility indicators are aimed at measuring the speed of the price change: if the price changes rapidly, the volatility is high, and vice versa. Such indicators as Bollinger Bands or ATR may help determine the riskiness of the current trading conditions. Volume indicators, as follows from the name, represent the volume of deals executed on the asset. One of the volume indicators available on the IQ Option platform may help a trader understand the demand of the asset and understand whether a reversal of the trend might be expected soon.

As you see, there are plenty of indicators to choose from. If you are not sure how to combine different indicators, read our article “Learn to Use Technical Indicators Correctly”. Learning about the purpose of the indicator is crucial and you need to do it before you start experimenting with its configurations.

Default settings

Once you have decided on the indicators that suit your approach, it is time to apply them to the chart. One sure way to get the indicator to work correctly is to use the default settings. In fact, many strategies are based on the default settings of indicators, since those are the settings that the indicators were intended to use with originally. 

It is important to mention that the usage of default settings does not make the indicator less useful or precise. The indicator will still work as it should and it might be preferable to leave it with the standard settings if you aren’t sure how to adjust the settings correctly. 

How to Choose Indicator Settings?
The default settings of the RSI indicator

However, there are situations where the indicator’s work can be enhanced by changing the period, for instance. More experienced traders can test different settings in order to come up with the configuration that works best for them.

Adjusting the settings to your taste

An important basic rule of the way indicators work is that by decreasing the period of the indicator you are increasing its sensitivity to price changes. At the same time, by increasing the period, you are decreasing its sensitivity, making it more likely to filter out more price fluctuations. 

If you wish to learn how to choose indicator settings, remember this simple rule when adjusting your indicator for your trading approach. Short-term traders might be looking for more frequent signals and might adjust the settings to be more sensitive to the price. However, such settings may result in more false signals, so it is necessary to double check all indications and be prepared for possible losses. No settings can guarantee 100% success rate.

At the same time, long-term traders may be looking for less frequent, but stronger indications, setting their indicator on larger periods. While this will ensure that the indicator only gives signals in case of stronger price swings, the downside of this approach might be a longer wait for the indicator’s signals. 

Conclusion

The main point of utilizing a technical indicator is understanding the way it works and the benefits it might bring you. Understanding the functions of a certain indicator is more important than its settings — without understanding what you’re trying to achieve, there is no point in implementing an indicator to the chart.

However, if you understand what the purpose of the indicator or indicators is, experimenting with the indicator’s settings might be rewarding. While all indicators work just fine with their default configurations, more experienced traders may try adjusting the indicators to their specific needs and use them on the Practice balance to see how they perform with different settings. It all comes down to your personal trading strategy and preferences.

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