Stochastic Trade System - Generating Index Signals
Stochastic Oscillator indicator can be combined with other indicators to form a Stock Indices system. For our example we will combine stochastic oscillator indicator with:
- RSI
- MACD
- MAs
Example 1: Stock Index Stochastic System
Sell Signal Generated using Stock Index Stochastic System
From our system the sell signal is generated when:
- Both Moving Averages MAs are moving down
- RSI is below 50
- Stochastic heading downward
- MACD moving downward below center-line
The sell signal was generated when all these rules were met. The exit signal is given when a signal in the opposite direction is generated i.e. When the technical indicators reverse.
Good thing about using such a Stock Indices system is that we are using various types of Stock 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 Stock Index indicator
It is very useful to combine more than one indicator, as a combination of Stock Index signals is better than relying on a single technical indicator. The indicator combinations reinforce each other, & cancel out false whipsaw Stock Index signals.
A trend following indicator helps a trader to see the overall picture, while using more than 1 momentum Stock Indices indicator gives better & more reliable entry & exit points for trading Stock Indices.
Example 2: Stock Index Stochastic System
Buy Signal Generated using Stock Index Stochastic System
For this example the trend is clearly upward, but at some point there were a few Stock 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 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 the moving averages 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 indicator is above zero center-line even if the MACD lines are heading downward 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 upwards.
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.
