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