Stochastic System - Combining Stochastics with Different Types of Indicators
This topic should be called: Combining Stochastics with other Indicators, but Stochastic System sounds real nice.
Stochastic Oscillator technical indicator can be combined with other technical indicators to form a system. For our example we will combine it with:
- RSI
- MACD
- Moving Averages Technical Indicator
Example 1: Stochastic System
Sell Signal Generated using Stochastic System
From our system the sell signal gets generated when:
- Both Moving Averages are moving down
- RSI is below 50
- Stochastic moving downward
- MACD moving downward below center-line
The sell signal was generated when all these rules were met. The exit signal is generated when a signal in the opposite direction is generated i.e. When the indicators reverse.
Good thing about using such a system is that we are using different types of indicators to confirm the trade signals & avoid as many whipsaws as possible in the process.
- Stochastic - is a momentum oscillator
- RSI- is a momentum oscillator
- Moving Averages Technical Indicator- is a trend following indicator
- MACD- is a trend following indicator
It's very useful to combine more than one indicator, as a combination of signals is better than relying on just a single indicator. The indicator combinations reinforce each other, and cancel out false whipsaw signals.
A trend following indicator helps a trader to see the overall picture, while using more than one momentum technical indicator gives better & more reliable entry & exit points for trading forex.
The indicators combinations & their signals help to decipher a lot of the market activity.
Example 2: Stochastic System
Buy Signal Generated using Stochastic System
For this example the trend is clearly upwards, but at some point there were a few forex whipsaws generated by the stochastic oscillator technical indicator, can you identify them? - So the question is how can a trader avoid trading these whipsaws?
Well, the answer is that by looking at the other technical indicators such as MACD indicator a trader could have avoided the whipsaw, even the MACD indicator had not given a crossover signal although it was very close to the zero center-line level, at the same time the gradient at which moving averages technical indicators turned was not so sharp as to warrant a decisive market trend reversal. Well the thing is that it's not so obvious when it comes to recognizing market whipsaws: it is a skill that takes some time but after some time you can spot whipsaws from a mile away.
One tip is that as long as MACD indicator is above zero center-line even if the MACD lines are heading downward then the trend is still upward. As you can see from the above example MACD indicator never went below zero line and afterwards the upward trend continued with the MACD indicator maintaining above Zero line and continuing to move upwards.
During ranging markets Stochastic Oscillator indicator will give the fastest signals which are prone to whipsaws. This is why stochastic oscillator is best combined with other indicators & the signals traded are confirmed by another one or two other indicators.
What is a Trading Plan? - Writing a Plan Example Template
Alternatives: EA Automated Robots or Copier Trading Signals
