Spud's Predictive MTF Stochastics

Spudfyre's Predictive Multi-Time Frame Stochastic Trading

Trading the past trends using long term charts such as H4, Daily and Weekly do great in trend trading until the trend reverses. Of course, even during a trend there are hills and valleys that can take out our stops and leave us in a losing trade, even when we had made the right trade.

For the small investor in Forex this is our ongoing nemesis. We make the right trade, our stops get hit and we lose our money, only to discover the price hits exactly where we thought it would end up. In otherwords, we make the right trade but end with a stop loss.

What if we had some tools that predicted where price was going. We can't see into the future and we have to be aware of news in the world that may cause drastic change. However, even with drastic events there are fundamental changes that occur in the market that hold true when the market is behaving "normally".

These changes can only be seen over multiple time frames. The long H1 and H4 time frames give us some bearing of where the markets have been headed in the past. They tell us where the future market must go in order for these long term charts to change. Our short term time frames like the M5,M15 and M30 are what build the H1 and H4 and even longer time frames. Every move, up or down on the M5,M15 and M30 over time give us our final H1 and H4 result.

The M5 builds the future. Actually we could say the M1 does, but it moves far to fast to be able to do MTF analysis in real time.

Whether you agree or disagree with this is a matter of perspective and not a point of debate. However, in order to use Predictive MTF Stochastics in trading you must get your head securely wrapped around the idea that the M5 will trigger change and that this change will appear in the M15 next and then the M30 and then finally the H1 and H4.

The trap and failure is looking at H4 and seeing a long downhill trend and expecting that everything will move in that direction in the future. That doesn't mean it won't happen, it just isn't the way to trade for the future. We all know that if H4 is <20% K on the Stochastic for any period of time, that at some point in time it wil rise and climb and we want to be entering the long trade when it starts to rise....not entering the short trade praying it will continue to make some pips.

When looking at the charts, I can tell you from personal experience that using the M5 as a building tool to predict the moves of the markets is mentally tough. Too often I drift off and put too much weight on what the H1 and H4 are doing...thinking my price will be attracted to where they were rather than where they are going.

All examples will be on EUR/USD as this is what we primarily trade.
We use 5 charts: M5,M15,M30,H1 and H4.
We only use the Stochastic Oscillator as an indicator.
M5 is 14,1,1 Simple MA, Low/High price field with Slowing=1
The rest are the same except they use 14,3,3
We set the M5 levels at 90% and 10%, the rest at 20% and 80%
We remove the %D line and only use %K

My typical chart layout looks like the one below. Notice I have candlestick price on the M5 and line price on the H4. ( I use line price on others but do not display it typically).

A word on chart shift...

When backtesting you need to be aware that chart times are opening times. As such the Stochastics have to be shifted accordingly. For example an M5 chart showing 22:50 will have accurate closing stochastics at M15 chart showing 22:30, a M30 chart showing 22:00, an H1 chart showing 21:00 and an H4 chart showing 16:00. This is critical when back-testing.

During live trades we only want to look at the last closed period end, not the active stochastic which will be moving. This can be really confusing on H4 which on some charts only wags up and down on the last hour and and keeps the remaining time peiods from moving even if they are still part of the open candle.

Pay attention to what the close of the time periods are.

In chart diagrams and showing concepts that are not time critical I may not shift the charts as this adds a huge amount of time to creating them.

In reviewing real trades or live trades, I will present the charts with the proper shifts.

Please be aware of these shifts when posting your own charts and adjust accordingly (especially on past trades or backtests).

To introduce PMTFS (Predictive Multi-Time Frame Stochastics) let us look at Oct 20th 2008. Here we had the H4 upward trend reverse and price drop.
We'll take a look at how we could have predicted that price drop and enter the short.
Below is an overview of the charts for that day:

We'll start looking at 9:15 on Oct 20th at 9:15. This is where we have an M5 trigger point. An M5 trigger point is any time our M5 %K Stochastic (%K) is <10 and >90 at close.

Fundamentally, the M5 trigger at > 90%K means a short transition is likely. An M5 trigger at <10 %K means a long transition is likely. However, alone it is meaningless without analysis of multiple time frames!!!!!

The chart below shows us a short trigger. The M15 is showing us that M5 has been building upwards and that if look at the M5 price we can see price has moved up too. In this case we would ignore the short trigger entry.

Here is where we step back into my earlier threads of MTF Stochastics and Escalator PIPS. We can see that M30 is nosing over and wanting to dive, our H1 hasn't quite reached the 80 %K line and H4 is climbing. Any short at this moment is a "definite not likely" to happen moment.

So everything looks up (long), we have no entry here. If you were already long you should probably stay in but in this case we are just starting our day.

At 9:40 we hit another M5 short trigger and still we have no entry and things still look in favour of the long (up) for much the same resaons as the previous chart.

In PMTFS trading our M5 trigger is a signal and may be an entry point. We can also enter after the trigger signal point if the trend looks like it will reverse and we want to wait. We are thinking long term here and not scalping a few pips. The trigger is needed before we can enter but entering after the trigger is fine when we can see the new trend form.

The chart below is at 9:55 and again we have reached out trigger (and we did reach the trigger 5 mins before that too), but everything still looks long and we need to sit tight.

The M30 still supports weakness in our price but we want to see the M5 and M15 build M30 and not follow M30.

At 10:55 we have watched everything turn to the short. Price has dropped 35 pips. Our M5 has reached a new long trigger.
Our M15 and M30 are now headed down, this means our M5 has built a short and our M5 long trigger can be ignored. We still have no entry.

Note where H1 is, very high and we should see M15 and M30 start to pull H1 a little later.
H4 is completely deceiving us and we now need to ignore H4. It is 3 hours old. If M15 and M30 were low and moving up H4 would have more meaning.

Here comes the exciting part!
At 12:10 we get an M5 short trigger and you bet we jump on this trade. M15 is down, M30 is down, H1 is down and look athe H4 price...down.
The H4 stochastic is inverted to price (stochastic went up, price went down) which is even a better indicator that our down trend is well supported.

Notice the difference of this M5 short trigger and the relationships of all the other MTF Stochastics to the previous charts where we had short triggers. This following of the movement is important. We can't just reach certain levels and trade, we need to follow what the moves are.

You will notice that this is pretty much an MTF or Escalator To Pips trade now. The key difference has been or M5 trigger and the past movments of the stochastics. Watching M5 build the higher stochastic time frames will give us a huge advantage on our entry. We have "predicted" a short trend and we will be rewarded with one.

Follow the the stochastics down as per MTF or Elevator to PIPS and this is over at 14:50 with 75-90 PIPS in your pocket.

nice job. Well put. Will try it out

Very nice Spud, thank you.

Great predictive tool. Spud, thank you so much.

Harry

It looks like it can be made into EA>

i find this kind of approach to stochs very helpful because not every time the stoch bounces off the 90/10 will price turn around.

the novice looks at stochastics and concludes that it gives alot of false signals because price does not go with them every time they enter a trade when the stoch crosses the 80/20 lines.

using MTF stochs (whatever version) i find gives the trader a sense of the waxing and waning of price intensity or momentum. on any TF the stoch makes waves up and down on the chart.

but, when a wave on the M5 is in sinc with a wave on one or more higher TFs price is probably going to make a strong move.

when the M5 is not in sinc with one or more TFs it is a sign that the M5 stochastic line is averaging in a shift in momentum, but not necessarily a shift in the direction of price.


as always Spud - thanks for your contribution to our better trading


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WOW! That's very well said.

With MTF Stochastics we can easily get ahead of ourselves because we see perfect long trade setups forming and want too leap in early.
This following few charts are an example about how to avoid early traps, wait for the M5 trigger and enter the trade when the price starts to build the higher time frames.
In these diagrams the cues are very subtle, expecially iin the higher time frames. However, if we watch early on what is happening it is very clear when to enter the long trade.
This is Oct 10 at 2010. We see an M5 long trigger after a downhill trend. See how all our stochastoics are low and pointed down. This can be a real temptation in MTF Stochastics because we know these stochastics are going to go up...problem is when and how to avoid any further downhill price. It is our M5 trigger that tells us when to enter.
Right now we have no entry.

At 2050 we have seen a number of M5 triggers and I bet our trigger fingers are getting itchy for a long entry. Notice the price on M5 it is still going down and all our stochastics are still pointed down.
The exception is the M5 stochastic see it rise while price falls. These small inversions between price and stochastics are very telling when used in conjunction with other time frames. Unfortunately we can't live off these inversion signals, but they are another tool that supports our expectations of price movement. These inversions are tell tale signs of change...again it is a matter of "when" vs "if" and we want to avoid any traps.

At 2135 there still isn't much change. We can see a flattening of the M30 and in conjunctin with the rise of the M15 this is interesting. Again, even though we have 2 M5 triggers it is too early to enter.
However do you see that inversion has moved into M15...the price is down and the M15 stoch is rising.
We can't enter with price moving down. Even though we are expecting an upward change we want to enter knowing we have that change in place.
Having said that, this is a good gamble for a long trade entry. We've seen the M5 inversion move to the M15, we know our M5 trigger tells us to go long and even though our M30 hasn't risen, it probably will.
If it were me, I'd wait. It is just a whole lot safer.