Stochastics and price action

Quote from alex.samant:

The only 2 problems with stochastics (and those made me replace it with a MACDHistogram as an oscillator) are:

1) It's subjective in what concerns the time window, as it measures the close vs the range of that time window, and with all the smoothing applied to it, it still issues false signals, and when price action is choppy, you are in for a rough ride.

You would even have the surprise of getting different signals using two consecutive time-windows, say a 9 and a 10 or 11.

2)It is normalized and does not have a clear quantitative measure of momentum therefore making the rules of buying when it is oversold and selling when it is overbought useless and most of the time, even combined with a higher timeframe notion of trend it will have you selling into a new uptrend and buying into a new downtrend.

Plus, it's too sensitive and it is measured using the closes. When you use it intraday, what difference does the close on a 10 minute bar make?

Therefore, as an oscillator i would recommend using a MACD Histogram calculated using the H+L+C/3 formula instead of the Close price and considering the following rules:

When MACD Histogram is above 0 it's overbought and when it's below 0 it's oversold. NOTE: This can ONLY be used considering a higher timeframe trend.
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your point is definitely valid but I don't see it fit on my strategy

I tried MACD in many ways but it seems like this particular indicator is more suitable for longer time frames (this is just an assumption) on 1 minute charts it lags big time On 1 minute you don't see trends in the context of how trend is defined(some people call it parabolic trends). You see more like swings and that's exactly what I am, talking about. Remember this, trading on 1 minute charts is trading in the middle of the storm and it's a green pasture for scalpers. The only difference is that I am trying to get away with a 20 tick swing.

This is going to sound very odd but looking at other time frames doesn't help at least on this type of trading.

I compare this to my current way of trading ER2. I use 5/15/30 time charts looking for S/R levels The only similarity with this stochastic strategy is that I trade price. In other words, I have to see intention on the market to break a higher/high lower/low for me to pull the trigger.

As for false signals, believe me everything you put on your charts will fool you sooner or later. Nothing is perfect or foolproof.

Alex I said I don't see it fit on my strategy but by no means I am trying to diminish your post. Perhaps I didn't grasp your concept very good. In my view, MACD doesn't go as well as stochs in terms of price action. I understand it's limitations as you mentioned and I completely agree.
I also don't want to imply that your explanation was not good. Just take what I have in mind about setups and if you could elaborate a little more please do
 
Quote from AAAintheBeltway:


That lead to the concept of divergence, which is still the most powerful signal in technical analysis. At its most basic, a divergence indicates that the prevailing trend is losing steam, as price is unable to close at an extreme. [/B]
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IMO, the above paragraph describes the best way to put stochastics to use. If you don't understand regular and reverse (hidden) divergence, it would be well worth your time to learn to recognize these powerful signals and see if you can find a home for them in your trading plan.

I gave up on OB/OS levels many years ago. Buying OS and selling OB levels always seemed to work for me except when it didn't.

Best,

HM
 
Quote from bvam1:

It's a good indicator. You need additional filtering though (i.e. Some other indicators)
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Why do believers in Technical Analysis always say "you need additional filters, though"?

How is combining different trash piles going to lead to anything other than a larger trash pile?

PROOF, folks. People using TA, Gann, Elliot, Fib, astrology always squirm away from hard, statistical proof.

It always seems to be "you need additional filters, though" or "well, it works for me."
 
AAA: Thanks for the historical bit. :)

feb: I got your point. The thing is that everyone has his own strategy and use of indicators. In the end, every indicator measures the past and whether we use TDRoc, LBR310, MACDHistogram, STO, RSI, W%R or anything else, we actually see the same thing. The difference is in interpretation and the system into which that certain indicator is integrated.

rcanfiel: Your ignorance will prevent you from trading succesfully, or even better trading at all.

However, filtering an indicator with another indicator per se, on the same chart is often something that, regardless of it's efficiency, is putting more stress on the trader. That is if you are discretonary.

You don't need to filter 5 indicators with 5 more and try to trade. It's hard with 1, let alone 10.

The best thing is to have a clear idea of what you are trying to do.

For instance, you might look at a 1 hour chart and see the market in a clear uptrend, with record momentum. You want to buy a retracement, so you turn to a lower timeframe to gauge when a dip is oversold and buy into the overall trend. It's actually the Dow Theory.

This is an example and it's not too detailed. Just an illustration of a concept that is materialised through indicators. You could also be using trendlines and no indicator. It depends on each person....

And above all. Know your edge and keep consistend while watching your money well. A journal helps a lot.
 
One more thing.

The market rarely looks the best for someone to take action.

It's up to you to wait for those times, if you care about your account's sanity.

All in all, my personal opinion is that stochastics work best with support/resistance (key S/R levels, where fibs meet with pivots and natural S/R).
 
I don't say you need additional filters for indicators.

I do believe you need a filter through which you view the market you are trading. Ideally, this filter tells you when to look for longs, when to look for shorts, and when to stand aside.

Once you have that filter developed, oscillators can be very useful in determining your entries and exits.

If you have tried to use indicators such as stochastics as a stand-alone trading method, I understand your frustration with TA.


Quote from rcanfiel:

Why do believers in Technical Analysis always say "you need additional filters, though"?

How is combining different trash piles going to lead to anything other than a larger trash pile?

PROOF, folks. People using TA, Gann, Elliot, Fib, astrology always squirm away from hard, statistical proof.

It always seems to be "you need additional filters, though" or "well, it works for me."
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