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The Good the Bad and the Ugly Stochastic

  • #1
  • First Post: Edited Apr 3, 2021 3:24am Apr 2, 2021 11:40am | Edited Apr 3, 2021 3:24am
Hey guys,

I'm a big fan of stochastic and of trend following but on the shorter timeframes

I'm trying to find what indications one really need for a successful trade while using the stochastic
I'm trying to find a simple yet effective strategy where stochastic and the superior trend timeframe are both used

If I go back to the basics and filter out the noise, I think I need the following conditions for a successful trade but maybe I'm missing things here and there and with your experience and knowledge, some of these missing parts could be solved easily. To me I feel like I need to:

- Follow a simple strategy to enter and exit a trade, that's essential to me without having too many indicators to watch
- Be on the right side of the superior trend timeframe (PA crossing the 5 EMA on the trend timeframe for example)
- For the stochastic to tell me when the price is in the overbought and oversold territories and ready to head up or down
- Know if the power is on the side of bears or bulls which I think could be seen through the volume histogram with the first red and green bar which can be observed just after the stochastic has crossed
- Take only buy orders in an uptrend or sell orders in a downtrend and most important of all finding a way to know when the bigger trend is reversing or not which has been my biggest issue so far
- Filter all the small trades that aren't worth it (But how?)

It's just food for thought but based on that and on my type of trading, would it not be possible to:

1/ Look at the bigger trend on say the 1H timeframe
2/ Wait for stochastic to be in the oversold or overbought areas on the 15 min chart, depending on the direction of the trend
3/ If the trend is upward, wait for stochastic to cross up. If it's downward, wait for stochastic to cross down
4/ Look at the very first bar of either the volume histogram or the MACD histogram to confirm stochastic crossing. If it turns green for an uptrend, enter a buy order. The opposite for a sell.

As for the trend, have you guys ever tried the Aroon indicator?
I haven't used it for long but it seems to be quite effective on the 1H timeframe to stay in the trend, though could add a level of complexity.

However, if too difficult to read it which I think only need some to get adjusted, the size and color of the first volume bar seem to be right on point when the trend is turning which could be used as a confirmation of stochastic crossing

To sump up, the indicators that could be used would be:
- 5 EMA, Aroon, Volume bars to determine the 1H timeframe
- Stochastic, volume, 5 EMA on the 15min chart


Just food for thought. What do you think? Does that sound good? What could be changed or improved? Are you using stochastic? Do you see any problems that could soon rise following this?
  • #2
  • Edited 12:40pm Apr 3, 2021 10:44am | Edited 12:40pm
Quoting MIC85POU
I'm a big fan of stochastic
I'm a big fan of Stochastic too. It is great indicator! But I'm using it mostly as an exit point, or as a point where to start TS.
Stochastic is not good on trends (if use it as entry signal) because it is oscillator (it has -100 - +100 range only).

I'm using it as entry sometimes, but in this case it must appear far away from average price. For example if stoch appear at 150 points (15 pips) away from average price. This will be a good entry.

I'm filtering trend using 50, 100 and 200 EMAs on 1m TF

Quoting MIC85POU
Follow a simple strategy to enter and exit a trade, that's essential to me without having too many indicators to watch
The strategy can't be simple. Forget about it. Trading is not simple, it is hard. There are several types of indicators. All you need is to have only one of each type. For example there is no need to use RSI and STOCH, because they are both oscillators. Moving average is trending indicator, so there is no need to have another MA. So Stoch + MA is ok. Also there are volume and time based indicators and you should use them too.

BTW I'm using 100/3/3 stoch settings and 96-94/4-6 cross for signals. Default 21/3/3, 5/3/3 and so on are too noisy.

For example if you are using MACD, it is great to use 200MA as trend, MACD as entry and Stoch as exit points. That will be accurate.
MACD default settings, MA = 200 EMA and stoch 100/3/3 with 96-94/4-6 cross as signal. Also you can use Envelopes (instead of EMA) - that will lot allow you to go long very far away from MA and not go short at a very low. But you need to calculate the distance it will vary on every forex pair, commodity, metal, crypto etc. And Also it is VERY important to have timing. And I'm not only talking about sessions, but even hours and minutes.

P.S. Here on FF there was few great traders and they spent about 3 years trying to figure out stoch trading and failed. Check first pages TMS thread. I have tried too and made tons of tests and stoch itself isn't enough.
Observer effect
  • #3
  • Edited 3:37am Apr 5, 2021 2:14am | Edited 3:37am
Thank you so much for your help.

I applied the settings you recommended for stochastic and I think the signals are gonna be much clearer now
I'll have to try the three EMAs you're using for the trend

So, when the price is over the 200 MA, I would only take buy orders when MACD is crossing up, is that correct?
But should I only use 1 timeframe with the 200MA on?

May I ask if you know why sometimes there are false signals with MACD as we can see in the purple rectangle in the screenshot
We can also see the MACD histogram bars turning red and below the 0 line even though the price doesn't seem to follow through
Is it because MACD is warning us that a downtrend is coming or is it because the price is ranging and MACD becomes less accurate?

When you're talking about timing, you mean knowing at what time you should exit the trade? How do you do that?
And by the way, a question I've been meaning to ask, are you using fundamental analysis in any way? for example, not trading when important news are about to come out?

Thanks a lot

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  • #4
  • Apr 5, 2021 4:35am Apr 5, 2021 4:35am
Quoting MIC85POU
So, when the price is over the 200 MA, I would only take buy orders when MACD is crossing up, is that correct?
If price > 50, 100 & 200 MAs and they are in correct order.


Quoting MIC85POU
But should I only use 1 timeframe with the 200MA on?
I'm using 50,100,200 on every timeframe even on daily.


Quoting MIC85POU
May I ask if you know why sometimes there are false signals with MACD as we can see in the purple rectangle in the screensho
Your Stoch is out of the range, so you must not take that long trade. Stoch is already on top.


Quoting MIC85POU
When you're talking about timing, you mean knowing at what time you should exit the trade?
I'm trading using 1m tf, checking main direction from 1h and 4h. So my timing is 1h. If the trade is not in profit with 1h I'll exit. Also I'm trying to enter the trade at the start of every hour. Because it is not good to enter for example at 13:54 - there will be no room. And of course check the session. If you have a signal at the end of US session for example - it is better to skip it.

Quoting MIC85POU
And by the way, a question I've been meaning to ask, are you using fundamental analysis in any way? for example, not trading when important news are about to come out? Thanks a lot
I'm not using fundamentals at all. BTW news are very good, because of increasing volatility.
Observer effect
  • #5
  • Apr 5, 2021 5:06am Apr 5, 2021 5:06am
Whatever indicator(s) you use, it is better to be consistent and be a master in its use.

KP
Do your homework, follow the footprints of smart money
  • #6
  • Apr 5, 2021 10:12am Apr 5, 2021 10:12am
Oh, I see. A lot of valuable information. Thanks a lot

May I ask if you would have bought the last run up of EURUSD where the purple dashed line is placed despite stochastic being in the overbought territory on the 1min chart? I placed the 3 EMAs, 50, 100 and 200. 50 is above 100 and 200. However stochastic is not in the optimal place. Would you take it anyway if stochastic gives you an opposite signal?

What information do these 3 EMAs give you that allow you to make a successful trade?
Do you usually exit the trade when the price crossed down the 50 EMA or do you wait until it crosses the 100?

Thanks again
Mike

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  • #7
  • Apr 5, 2021 10:25am Apr 5, 2021 10:25am
Quoting KeenPips
Whatever indicator(s) you use, it is better to be consistent and be a master in its use. KP
That's exactly what I'm going to do. Thanks for the advice.

I've used some indicators for a while without really mastering them and since I've found this forum, I'm trying not to change the indicators I'm using but to master them and possibly getting rid of those that would be redundant. Stochastic is definitely one I'll keep. Volume too. EMAs as well but I have mixed feelings about MACD. It has helped me stay longer in the trend but the way Ryu is using his 3 EMAs could potentially make MACD redundant if I'm using the EMAs correctly. Also I've been using the 15min chart for quite some time but I'm starting to feel that maybe the 1 and 5 minutes could improve my trading. I'll just have to experiment a little and stick with it.
  • #8
  • Apr 5, 2021 10:29am Apr 5, 2021 10:29am
I'm trading on 1h this way:

1. Price must be lower or higher 200 EMA.
2. MACD must change from red to green / green to red.
3. MMARB must be lime or red.
4. Stoch must be not in oversold/overbought area.

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As you see 2,3,4 was ok, but 1 not. So long trade on EU was not taken because close of the candle was lower than EMA 200. I'll enter long after next pullback.

Since this topic is about Stochastic I just show you how I use it.

Regarding to the 3 EMA - I just use them to see if it is a trend, or it is a flat. I don't use them to exit, I exit on Stoch, level, profit, trailing stop or time.
Observer effect
  • #9
  • Apr 5, 2021 12:36pm Apr 5, 2021 12:36pm
Thank you. I really appreciate it.

That's some system you got there.
I wasn't even aware of the existence of the MMARB bar but that could be useful to me to help determine the trend

Thanks to you I have a much clearer picture of what I should do now

Cheers
  • #10
  • Apr 5, 2021 1:02pm Apr 5, 2021 1:02pm
Yes this is just an example, but it is pretty good system to trade. I'm using it mostly as lazy btc trading.
Here the signal provider is MACD, and then you have to confirm it with 200 EMA, Stoch, MMAR and candle color/close value.
Also once you have entered the trade you can use Stoch as exit, but you have to switch to lower timeframe. For example if you are trading 1h, you can set 15m to check the stoch for exit or placing TP in profit.
Also you can use envelopes (instead of 200 EMA) with default settings. It will give you the information about distance. If the price if higher or lower the upped and lower band do no enter, because there will be no room to trade or it can reverse back.
Observer effect
  • #11
  • Apr 5, 2021 1:39pm Apr 5, 2021 1:39pm
The less indicators you use the better. Learn more about structure-based price action trading and you will need less indicators.

Trade safe and prosper.

KP

Quoting MIC85POU
{quote} That's exactly what I'm going to do. Thanks for the advice. I've used some indicators for a while without really mastering them and since I've found this forum, I'm trying not to change the indicators I'm using but to master them and possibly getting rid of those that would be redundant. Stochastic is definitely one I'll keep. Volume too. EMAs as well but I have mixed feelings about MACD. It has helped me stay longer in the trend but the way Ryu is using his 3 EMAs could potentially make MACD redundant if I'm using the EMAs correctly. Also...
Do your homework, follow the footprints of smart money
  • #12
  • Edited 4:00am Apr 6, 2021 3:24am | Edited 4:00am
I believe my strategy will be much stronger now thanks to you guys

Ryuryu: With MACD signal being confirmed with the 200 EMA, stochastic, MMAR, and the candle color/close value, your successful rate must be high
Better to have a signal being confirmed by different indicators. Indeed, using a lower timeframe is a great idea to be more accurate when you enter and exit a trade. I think I could either use the 5min & 1min timeframes or the 15min & 5min, the higher timeframe for entries and exits, to find the right set up and use the lower one to have a more precise entry and exit. What do you think? I think this could help filter out the small moves. Yet his would mean getting ahead of the higher timeframe where it wouldn't have crossed yet, am I right? So there could be a chance that the crossing doesn't happen if I'm trying to get ahead of it and getting in on the lower timeframe, right? I also like the idea of 2 EMAs crossing. I know a triple EMAs can probably better my strategy and help determine the strength but I'm not sure if I could handle it at this time. But I'll experiment for sure

Keenpips: You're right. From what I've read, some only seem to use the price action or just a couple of EMAs. I hope one day I'll be able to do that. At the moment my reading of the price action is limited. I can recognize a trend bar, a doji, I know that if the close of the last candle is close to the previous one, this could be a warning of a possible reversal or pullback. But I've ordered a book from AL Brooks entitled Trading Price Action Trends that I think will give me a better understanding of how to read candles and trade trends. He also wrote two other books about trading ranges and reversals that I'll probably get later if the first one is as good as I expect. Though, I would like to avoid to try to find patterns like head and shoulders and else because I believe it can be extremely subjective and could be prone to mistakes. I know some trade with resistance and supports to see if their trade is worth it but there seems to be many different versions, traditional, woods, camilla... I'm not sure which way to go. Are you using them?

I also have issues with placing stop losses. How do you know where to place them if I may ask?
I'm using Bollinger bands to find possible breakouts. Maybe there is a better way to find breakouts than the BB?
Maybe I could use the lower and upper bands to place my stop losses, though, I'm afraid that they could be hit with the long wicks you find on some candles.
  • #13
  • Apr 6, 2021 5:09am Apr 6, 2021 5:09am
Quoting MIC85POU
I believe my strategy will be much stronger now thanks to you guys Ryuryu: With MACD signal being confirmed with the 200 EMA, stochastic, MMAR, and the candle color/close value, your successful rate must be high
I came to conclusion that every indicator you have is just a tool. To chop the wood you need an axe, not a spoon. Spoon is for tea. For example MACD gives great entries. But why to enter long on downtrend? It is risky. MA is good to check the trend. MMARB is very important for me because I can visually check everything very fast. In fact MMARB is just a 10 colored MAs. Stoch is super great to find the exit and to filter out the entries.

But most people try to use Stoch for entry and MA crosses for exit. And then they stuck with trend and then the exit signal comes too late too. Stoch is not for entry it is for exit. MA cross is not for entry or exit it is to check if there is a trend and the strength of the trend.

About lower TF. I'm using EA that's why I'm trading on 1m TF. Manually I'm trading 15m and 1h. 1h is even better. I'm not so fast to trade 1m manually, but I know professional traders and they are trading that way with success.

I have tested a lot of possible variants and can say that I failed to find the setup where profitable are: MA crosses, MA crosses + MA order, Stoch, MMAR. They works good only together. The setup I have shown you is good for 1h TF trading and in most cases it is profitable with proper money management and timing.
Observer effect
  • #14
  • Apr 6, 2021 6:13am Apr 6, 2021 6:13am
Quoting ryuryu
{quote} I'm using EA that's why I'm trading on 1m TF. Manually I'm trading 15m and 1h. 1h is even better. I'm not so fast to trade 1m manually, but I know professional traders and they are trading that way with success. .
EA, that's an interesting way to trade. Do you need to know programmation languages to write automated trading strategies?
Because I've been willing to learn how to code to be able one day to use my own automated strategies but I'm not sure where I should start, which language I would need to learn and which software I could use to do it. Or maybe you are using the tools provided by your broker? I'm wondering if that's something difficult to do and what kind of knowledge it takes to create your own.
  • #15
  • Apr 7, 2021 3:50pm Apr 7, 2021 3:50pm
Quoting MIC85POU
{quote} EA, that's an interesting way to trade. Do you need to know programmation languages to write automated trading strategies? Because I've been willing to learn how to code to be able one day to use my own automated strategies but I'm not sure where I should start, which language I would need to learn and which software I could use to do it. Or maybe you are using the tools provided by your broker? I'm wondering if that's something difficult to do and what kind of knowledge it takes to create your own.
Learn mql4 or mql5 depending on platform Mt4 or mt5. There is so much available but Mt4 is my platform of choice.
I too have built systems using a 4h trend and a 1h stochastic pullback. The problem is determining trend strength. I have looked at many combinations some work better than others.
Good luck.
  • #16
  • Apr 8, 2021 4:40am Apr 8, 2021 4:40am
Quoting MIC85POU
{quote} EA, that's an interesting way to trade. Do you need to know programmation languages to write automated trading strategies? Because I've been willing to learn how to code to be able one day to use my own automated strategies but I'm not sure where I should start, which language I would need to learn and which software I could use to do it. Or maybe you are using the tools provided by your broker? I'm wondering if that's something difficult to do and what kind of knowledge it takes to create your own.
If you decide on MT4 and need help let me know.
  • #17
  • Apr 8, 2021 9:51am Apr 8, 2021 9:51am
Quoting Spikehunter
{quote} If you decide on MT4 and need help let me know.
Hey there!

Thank you for your help!

I'm currently using MT4 to send the orders and Tradingview for charting. I tried to do both on MT4 for a while but I was never able to get the Heiken Ashi candles right. I mean, I could add them through Insert > Indicators > Custom > Heiken Ashi but the candles have sometimes both colors, red and green as you can see on the screenshot and it's not exactly the best visual experience when trading but maybe there's something I didn't do correctly. Have you been experiencing the same issue? Because that issue among others like the volume that would display red bars when the candles were green have been the reason why I kind of put MT4's chart on the side and mostly relied on Tradingview. I even thought of moving to Oanda because of these. I wanted to avoir using two different platforms to trade

Attached Image

But if I can fix them, I would be very eager to learn mql4 though. Would you say it's difficult to set up an automated strategy on MT4?
Is there like a website where you can learn how to do it?

Mike
  • #18
  • Apr 8, 2021 1:24pm Apr 8, 2021 1:24pm
Quoting MIC85POU
{quote} Hey there! Thank you for your help! I'm currently using MT4 to send the orders and Tradingview for charting. I tried to do both on MT4 for a while but I was never able to get the Heiken Ashi candles right. I mean, I could add them through Insert > Indicators > Custom > Heiken Ashi but the candles have sometimes both colors, red and green as you can see on the screenshot and it's not exactly the best visual experience when trading but maybe there's something I didn't do correctly. Have you been experiencing the same issue? Because that issue...
Hi Mike,
I don't understand your problem with Volume as it is a single colour setup in chart properties, right click on a blank part of the screen. I don't use volume as its not really volume per se.
Heiken Ashi candles settings will depend on the indicator you are using. If you can still see the original candle again go to chart properties and set the candle to no colour.
Building an automated system as an EA isn't difficult. I have been doing, or trying, for over 20 years. I have used Visual Basic and MQL4. Having been a programmer many years ago (over 50) I enjoy building systems now I am retired.

I am happy to help but not to do. I don't have sufficient time to build stuff for others unless its also of interest to me.

I have attached an EA I sometimes use for testing strategies. Can't remember exactly what this one does but it is well structured and has some good examples of the code needed to run a system EA. It will give you an idea of what is required.

MT4 is a treasure trove for FX trading and I haven't found anything else anywhere near to its completeness. For stocks the best thing I have found is StockFethcer which has, what I call, a Natural English, interface. This might help you get into the idea of programming as well. The charting isn't so good though.

Attached File(s)
File Type: mq4 SMC Tester.mq4   13 KB | 520 downloads
  • #19
  • Apr 8, 2021 6:35pm Apr 8, 2021 6:35pm
I am not a too big fan in use stochastic, if compared with RSI, usually stochastic giving more OB and OS zone, but if combining with short EMA, maybe its useful to get better signal confirmation, in general, disadvantage leading indicator is giving a more false signal.
  • #20
  • Apr 9, 2021 4:44am Apr 9, 2021 4:44am
Quoting Spikehunter
{quote} I have been doing, or trying, for over 20 years. I have used Visual Basic and MQL4. Having been a programmer many years ago (over 50) I enjoy building systems now I am retired. I am happy to help but not to do. I don't have sufficient time to build stuff for others unless its also of interest to me. I have attached an EA I sometimes use for testing strategies. Can't remember exactly what this one does but it is well structured and has some good examples of the code needed to run a system EA. It will give you an idea of what is required....
I understand. Don't worry. I'm not here to ask anybody to do the work for me. I'm just learning from people with more experience so I can move in the right direction and build my own thing. Thank you for the strategy tester and website
I'll dig into it see if I can figure it out.
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