Stochastic System
This tutorial should be called: Combining Stochastics with other Technical Indicators, but Stochastic System sounds real nice.
Stochastic Oscillator indicator can be combined with other indicators to form a system. For our examples we will combine it with:
- RSI
- MACD
- MAs Stock Indices Technical Indicator
Example 1: Stochastic System
Sell Indices Signal Generated using Stochastic System
From our system the sell stock signal is generated when:
- Both Moving Averages are moving down
- RSI is below 50
- Stochastic moving downward
- MACD heading downwards below centerline
The sell stock signal was generated when all these indices rules were met. The exit stock signal is generated when a signal in the opposite direction is generated i.e. When the indicators reverse.
Good thing about using such a stock system is that we're using various 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 Technical Indicator- is a trend following indicator
- MACD- is a trend following indicator
It's very useful to combine more than one stock indicator, as a combination of signals is much better than relying on one single technical indicator. The stock indicator combinations reinforce each other, and cancel out false whipsaw stock signals.
A trend following indicator helps a trader to see the overall picture, while using more than 1 momentum stock indicator gives better & more reliable entry and exit points for trading indices.
The stock indicators combinations & their signals help to decipher a lot of the stock trading market activity.
Example 2: Stochastic System
Buy Indices Signal Generated using Indices Stochastic System
For this example the trend is clearly upward, but at some point there were a few indices whipsaws generated by the stochastic oscillator stock indicator, can you identify them? - So the question is how can a trader avoid trading these indices whipsaws?
Well, the answer is that by checking-on the other technical indicators such as MACD indicator a trader could have avoided the whip saw, even the MACD 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 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 trend is still upward. As you can see from the above example MACD indicator never went below zero line and afterwards the upwards 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 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 Indices indicators.
