Stochastic Trade System - Generating Index Signals

Stochastic Oscillator indicator can be combined together 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

A sell signal is produced when all predefined rules are fulfilled, while an exit signal is triggered upon the emergence of an opposite-market directional signal, typically reflecting a reversal in technical indicators.

The key advantage of employing such an Index system lies in the use of multiple types of Index technical indicators to corroborate trade signals, thereby minimizing the occurrence of Stock Index whipsaws encountered during trading.

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

The McClellan Oscillator smooths advances minus declines in candles. It looks a lot like standard MACD.

Trend indicators show the big picture for trades. Pair them with momentum tools for solid entry and exit points.

Example 2: Index Stochastic System

Stochastic System

Buy Trading Signal Generated using Index Stochastic System

In this case, the trend points up clearly. Yet, the stochastic oscillator created a few index whipsaws at times. Can you see them? The key question is how to skip trading those 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.

Keep this in mind: if MACD stays above the zero line, the trend points up. Even if lines dip, it holds. In the example above, MACD never crossed below zero. The uptrend went on, with MACD above zero and climbing.

In sideway stock index markets, the stochastic oscillator spots signals quick but risks false moves. Pair it with other tools. Confirm trades with one or two more indicators for safety.

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Stochastic Trade System - Generating Index Signals