Stochastic Trade System - Generating Index Signals

Stochastic Oscillator indicator can be combined with other indicators to form a Index system. For our example illustration we will combine the stochastic oscillator indicator with:

RSI
MACD
MAs

Example 1: Index Stochastic System

Stochastic Index Strategy - Buy Signals and Sell Trading Signals Generated using Stock Index Stochastic System

Sell Signal Generated using Stock Index Stochastic System

From our system sell signal gets derived/generated when:

Both Moving Averages MAs are moving down
RSI is below 50
Stochastic heading downwards
MACD moving downwards below center-line

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

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

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

It is very helpful to combine more than one indicator, as a combination of Index signals is better than relying on a single indicator. The indicator combinations re-inforce each other, & cancel out false whipsaw Index signals.

A trend following indicator helps a trader to see the overall picture, while using more than 1 momentum Index indicator gives and generates better & more reliable entry & points to exit trading Index.

Example 2: Index Stochastic System

Buy Trading Signal Generated using Index Stochastic System

For this example the trend is clearly upward, but at some point there were a few Index whipsaws generated by the stochastic oscillator indicator, can you spot them? So the question is how can a trader avoid trading these whipsaws?

Well, answer is that by looking at the other indicators like MACD a trader could have avoided the whipsaw, even the MACD had not given a crossover signal although it was very close to zero center line level, at the same time the gradient at which the moving averages(MAs) 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 Stock Index market whipsaws: it is a skill that takes some time but after some time and practice you'll learn how to identify these whipsaws.

One tip is that as long as MACD is above zero center-line even if the MACD lines are heading downward then the trend is still upwards. As you as a stock indices trader can see from the above example MACD never went below zero line and afterwards the upward market trend continued with the MACD maintaining above Zero-line and continuing to move upward.

During ranging Stock Index markets Stochastic Oscillator indicator will give the fastest signals which are prone to whipsaws. This is why stochastic oscillator indicator is best combined with other indicators and the signals traded are confirmed by another one or two other indicators.

Get More Topics and Tutorials:

Trade Stock Indices

Stochastic Trade System - Generating Index Signals