Stochastic Strategy

This tutorial should be called: Combining Stochastics with other Indicators, but Stochastic System sounds real nice.

Stochastic Oscillator indicator can be combined with other indicators to form a system. For our example we will combine it with:

• RSI
• MACD
• Moving Averages Technical Indicator

Example 1: Stochastic Strategy

Sell Signal Generated using Stochastic Trading System

From our system the sell trade signal is generated when:

1. Both Moving Averages are moving down
2. RSI is below 50
3. Stochastic heading downwards
4. MACD heading downward below center-line

The sell silver signal was generated when all these rules were met. The exit signal is generated when a signal in opposite market direction is generated i.e. When the indicators reverse.

The good thing about using such a system is that we are using different types of indicators to confirm the trade signals and avoid as many whipsaws as possible in process.

• Stochastic - is a momentum oscillator indicator
• RSI- is a momentum oscillator indicator
• Moving Averages Indicator- is a trend following indicator
• MACD- is a trend following indicator

It is very useful to combine more than one indicator, as a combination of signals is better than relying on just a single indicator. The technical 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 indicator gives better and more reliable entry & exit points for trading silver.

The indicators combinations and their signals help to decipher a lot of the market activity.

Example 2: Stochastic Trading System

Buy Signal Generated using Stochastic System

For this example the trend is clearly upward, but at some point there were a few silver whipsaws generated by the stochastic oscillator indicator, can you spot 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 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 downwards then the trend is still upwards. 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 upward.

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.