How to Choose the Period for Indicators

Abstract

The main focus of this paper is to show some principles that can be used to pick well-working periods for the evaluation of various indicators. This paper is focused on a momentum strategy based on a diversified ETFs, but the approaches are applicable in almost every strategy where the practitioners have to pick the period for the indicator. Firstly, there is an option to pick a larger set of periods to evade the risk of overfitting and the underperformance out-of-sample. Secondly, there is a possibility to make a decision based on the performance of each strategy that corresponds to the different evaluating periods. Each approach is examined concerning the momentum strategies based on 3- to 15-month momentum and results are compared also with a benchmark portfolio. Lastly, this study shows that periods that are almost fixed in the world of quantitative strategies, do not necessarily have to be the best.