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# how to measure the efficency of one indicator?

Discussion in 'Technical Analysis' started by robinxing, Apr 2, 2008.

1. ### robinxing

how to measure it with statistical tools ?

any books talking about it ?

thank you

2. ### LindaJolley

The lack of ways of measuring an indicator's efficiency is one of the leading defects of current software. About all the software allows you to do is build a system, and that's jumping way ahead of what you want to know about the indicator. There ARE ways to standardize the size of the moves "predicted" by the indicator. You could use Std Deviations or AvgRange. I have done it, and I did find the system I sought. But for starters, your best bet is to go thru miles of history and mark S or s (big success, little success) or F in a paper tally for each signal the indicator gave. This will tell you more than any math formula. I will save you some trouble and tell you that most published indicators are worth less than you paid for them. But reliable patterns DO exist.

Linda

3. ### mrbrinks

Backtest it for yourself and see how well it works out.

4. ### pneuma

You need to put it in context, an indicator by itself means nothing. Work out how you are going to use it, that is put it in a system, and then backtest it. Sharpe, sorinto etc will give you a good understanding of whether you ideas are valid.

pneuma

5. ### robinxing

thank you linda

thank you

6. ### MGJ

I think it would be preferable to ask, How do I define the "efficiency" of one indicator?

Once you've defined "efficiency" in a quantitative way, measuring it is a small matter of programming and historical testing.

spreadhseet a large sample of historical prices. Put in your indicator. If it outperforms, your averages/medians should tell you what you need to know.

8. ### robinxing

thank you MGJ

then how to test it with a quantitative way?

9. ### MGJ

how do you define "efficiency" ?

10. ### robinxing

I want to design a indicator to calculate the support and resistance level similar to CMO
I hope the incator is more sensitive than CMO
I do not know how to improve it
thank you

#10     Apr 3, 2008
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