Thank you! I am a big fan of KISS approach, but for a sake of better understanding please allow me few more questions.
It is my understanding (please correct me if I am wrong) that blinkies, just like histogram, depend not on data in RAW but on data in JPG preview that gets saved with RAW, and in turn JPG preview depends on settings for Picture Mode, Saturation, Contrast and Gradation. Thus am I correct in understanding that one would want them set to something like Muted, toned down Saturation and Contrast, and Normal Gradation while deciding what optimal RAW exposure is? If yes would ETTR at such settings introduce bigger chance of later blowing highlights in the post-processing? I am asking because I think I have seen a shot taken with ETTR and Muted that was not blown yet became blown once one applied iEnhance in post to it's RAW.
You are correct. The histogram and blinkies are from the JPEG preview and not from the raw file itself. Most cameras allow some headroom for highlights by using an ISO sensitivity somewhat higher than the Ssat value measured by DXO, resulting in underexposure. So that the LCD preview and histogram data do not show underexposure, they are adjusted to the right which effectively masks the degree of underexposure. The KISS approach yields satisfactory but not optimal results and one must know one's camera to get better results.
I don't have the Olympus model under discussion, so I will show results for the Nikon D800e. The principles are the same for any camera, but the results will vary. The first step is to expose a uniformly illuminated 18% gray card according to the camera meter (the same results can be obtained by exposing a white target or the computer screen filled with white). I used my computer screen calibrated to a WB of 6500K. The spike in the histogram is somewhat to the right of the expected mid value because of the tone curve applied by the camera (the Nikon standard picture control in this case). The Adobe RGB pixel value was 156 rather than the 117 that would be expected with midgray.
The next step is to look at the raw file. Rawdigger is excellent for this purpose. The gray value for the green channels is 3 EV short of clipping, whereas 18% gray should be 2.47 EV from clipping. This allows for 0.5 EV of highlight headroom. The raw pixel value in the 14 bit raw file for the green is 1986 to give a saturation of 12.1%. In the gamma 2.2 Adobe RGB this corresponds to an 8 bit pixel value of 98.
To get an ETTR exposure, one would have to add 3 EV, and this does show the green channels just short of clipping.
The next step is to look at the camera histograms and blinking highlights for these exposures. As shown in the table below, the plus 2.33 EV exposure gives no clipping in the camera histogram and blinking highlights, and the plus 2.67 EV exposure does show clipping in the histogram and blinking highlights. Backing off of the plus 2.67 EV exposure to the Plus 2.33 one as suggested would give a raw file 0.67 EV short of full ETTR. The camera histogram for the Plus 2.33 EV exposure is shown (one should use the RGB histogram in case there is clipping in the color channels). The ACR results rendered into Adobe RGB are also shown for those who judge ETTR exposure with ACR/LR. For the most accurate results one should use PV2010 with -0.35 EV exposure to compensate for the baseline offset ACR uses for this camera.