MTF Stochastics

I knew there would be an easier way!!!

G-Man

Would you kindly explain the following comment you made? Thanks.

I thought I'd post an explanation on time frames in more detail. Hope it helps.

As you know by reading this thread we look for a long entry into a trade by looking for mutliple time frames crossing up above 20 as per the previous 80/20 rule I wrote about.

Using multiple time frames is a choice between reliability and frequency of trades. The longer time frame you use to confirm an entry, the more reliable the entry will be. Simply because it takes much more price action to turn a 4H stoch comapared to a 15M stoch. The downside is that 4H entries are much rarer than 15M entries. The upside is that you can earn more with a 4H stoch than a 15M stoch. The downside is that you will have more draw downs in a 4H cycle than a 15M cycle.

The reason we use mutliple time frames is to gauge the movement of the market during our trade, to confirm there is a trend building and to find an exit point. In otherwords multiple time frames act as a trend, oscillator and volume indicators all by themselves when used together. The stochastics are used because they are easier to read then price. Stochastics give you a percentage scale of movement.

The picture below shows how the smaller time frames builtthe 4H stochastic move. You will almost always see this same picture for every 4H stochastic move that meets the 80/20 rule.

What is important here is understanding that a 4H candle from open to close is made of 4x1H candles that move within the 4H candle period, 8x30M candles and 16x15M candles. That means that each and every 4H candle result is going to depend on how 16x15M candles move within the 4H candle period, and these 15M candles will dictate how the 8x30M candles move which affect the 1H candles in the same period.

Why is that important. Beacause it keeps moving up the food chain so to speak. The day chart candle open to close is made up of 6x4H candle movements, 24x1H candle movements, and so on. As we get higher and higher in the food chain the "animals" become bigger and harder to change off their current direction of movement. Easy to make a fly move (15M)...much harder to make a rhino move (day).

Now comes the confusing part because once the longer time frames have established their movement direction it is much harder for the little time frames to move the larger time frame....unless they do it all together.

That gets confusing because on one side you can see how the small time frames build the large time frames, but you can also see how the large time frames will not change direction and make the small time frames follow their lead. That is all true. What will move the Day time frame is the combination of moves by the lower time frames working together....this the long time frames can't resist...though they try.

Obviously no time frame can move in one direction forever. So we need some way to measure where in the life the overall trend is. Here is where stochastics make that easy. If the 4H stochastic started at 0, every move up by the stochastic would solidify it's momentum upwards, but the higher it goes, the harder is gets to go higher..so the higher it is the stronger the momentum is or was and the harder it will be to go the next step higher. Eventually the momentum will run out, the stochastic will turn and move the other direction and run into the same set of rules....hence stochastics make there wavy up/down pattern.

SPud,
Thanks for your insight on this aspect of MTF.

I have wonder quite some time if we had available to us a current 4H candle that would change its form every 15 minutes or even every hour instead of waiting for a new candle to form at the next 4H period.

I say this because this would confirm what we would see in the MTF Stochs as the Stochs for up the "food chain".

The problem we all confront is that not every entry looks as pretty as the one you show above where all the Stoch are crossing the 20 line at virtually the same time. Most of the time we have to make judgments about when to get in because each Stoch is shooting across the 50 line at a different pace or height (long or short).

Ok, so we now know small time frames working together will move a large time frame. In this regard to move a upward day trend will require a combination of short moves working together in the short time frames.

So we should be able to see those movements on the lesser time frames...before the day moves, right?

The picture below provides a clear indication when the 15,30,1H and 4H all sync up to push the Day and make it reverse direction. Looking back on the lower time frames you can see how they started to work together to change the direction of the Day's downward momentum.

Actually, every correct entry is this pretty. The picture below is the last 3 long signals on the 4H chart. The red lines clusters are all where the 15,30,1H and 4H time frames crossed 20....see how close they are together?

If one chooses to use the 4H chart...they must trade the 4H chart...when the 4H closes. Not during the the 4H candle....unless one is willing to accept the risk and pitfalls of doing that.

If we calculate the 4H every 15 minutes...we won't be any more accurate. The math behind the stochastics would be skewed and be inaccurate.
What to do? Look at the 15M during the 4H candle and see if it is moving up or down....that is the partial 4H movement every 15 minutes.

To enter earlier, use the 1H chart and trade the 1H chart at it's close.

More advanced is to adjust the stoch. Use a 14,3,3 stoch on the 1H chart is a close approximation of a 3H stochastic....so you'd see the 1H and approx. 3H...giving you 1H advance on the 4H close.

The escalator methods allows you to trade the progression from 15 to 30 to 1H to 4H...but still the same exact concept.

I'm a poor example of patience...but the biggest think here is patience and waiting for candles too close. You won't miss anything trading the 4H chart waiting for the 4H to close. Same with the 1H. However, if you are like me...and have no patience and enter early...then you have to accept riding out large draw downs waiting for the trade to form.

I could draw a thousands similar entries on the 4H chart and they'd all look exactly the same for every correct entry. One will see the small time frames all meeting the 80/20 rule all about in the same "period" as the larger time frame you trade.

The 80/20 rule is a safety net of low risk trades...it is extremely conservative, misses a ton of trades but won't let you down very often. I put that up here first so there was a comfort level to trading but I think as traders we all have a low coefficient of patience.....especially me. Let's face it...we get bored we want to trade!

The last two entries and pictures on time frames can take you out of the 80/20 rule...as long as you understand the effect time frames have on each other and how they synchronize themselves prior to a reversal....hence the TF explanation. Or at least hopefully it adds some clarity to how the 80/20 rule works.

Spud

All I can say is wowwwwwwww
you do wear the hi- heels!!

By brain hurts... just looking at this stuff
let alone reading it ....good stuff.
now l know why I just follow the trend
because I really can not dance ... let alone backwards
but clearly you can very well!!
and can explain
-why you do it
- how you do it
- & show us how to do it going "up your stairs":
great work Ginnger

TEB

Spud,

Can you share some more charts on the 50% rule and the 5.3.3 on recent trades?

thanks

guppy

Spud,

I'm trying to clear this up with Teb but hadn't had any success yet. Maybe you can help.

Do you set your Stoch's to low/high or close/close? Do you know what he does?


Thanks,

Bagovino

Mine are low/high...since he does everything opposite of me...my guess is his is close I don't know how he sets that parameter on his stochs.

THE SPUD MTF STOCHASTIC SYSTEM
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Many people have asked about an exit strategy, given this is the hardest part of trading. I've been doing some experimenting and have combined the 80/20 rule with the 50 rule to develop what I think is a very good enter/exit strategy.

All trades start with the 4H entry by the 80/20 rule. Support comes from having the 15/30/1H supporting with their 80/20 crosses before the 4H. Optionally you can enter at the Spud50 if you are more conservative. Trades should go in direction of Day stochastic.

Trades are followed through the "50 Rule" (aka the Spud50), where 15/30/1H/4H cross the 50 line.

Exits can be done by choice on the 15/30/1H or 4H chart. Exit area on a long is when the 15/30/1H cross the 20 down but before it recrosses the 20 up. This is an "area" that the trader will have to determine as optimum for exit. The 4H exit is quite different. That exit on a long is done when the 4H crosses the 38.2 line. Short exits are the opposite.

The picture below demonstrates a trade. It shows all 4 time frames (15/30/1H/4H) so that you may study the interaction of each. You will see that as we move into longer time frames, our indicators converge so that we have less vertical lines showing by the time we hit the 4H chart.

In this example the only entry confirmation was the 4H crossing the 80 for a short! There was no clear confirmation from the 15/30/1H with the 80/20 rule prior to the 4H confirmation. Probably can be classified as a high risk trade. However all time frames hit the Spud50 which would have been a good indication to ride the trade to exit.

I have backtested this on GBPJPY and will include more examples on going of using this method.

Here is a long example. Here we have the 15/30/1H meeting the 80/20 rule prior to the 4H crossing at 20. In this example the Spud50 is quite wide.

If you look closely at the 4H exit on the 4H chart you will see the stochastic crossed the 80. On this candle it crossed both the 61.8 and 80 on the same candle...so the 61.8 cross applied to the 4H. Nervous traders could have exited on the previous candle when the stoch closed at 60 and still made a tidy profit.

Spud I wish you was my teacher when I was at school !
Your post are simple and clear , even my cat could understand how to use a stochastic reading your post

Well you might then have the first cat ever to trade Forex

eheh Surely it will trade far better than me

May 1st brought a long drawn out 4H short trade on the GBPJPY. In this instance the 15/30/1H crossed the 80 prior to the 4H crossing the 80. All time frames passed the Spud50 line and the exits brought some wide spread results.

The 15M exit lost 4 pips.
The 30M brought the best result with +61 pips
The 1H = +25 pips and the 4H = +28 pips.
The maximum draw down was 32 pips.

Results from the first live trade of Spud's MTF Stochastic System

GBPJPY Short 8:00 GMT
Maximum Draw Down: 15 Pips
Entry at 4H 80 cross @ 239.41
15M Exit +40 Pips
30M Exit +69 Pips
1H Exit +61 Pips
4H Exit +81 Pips

My result: +35 Pips

There are situations that can make what looks like a good trade a bad trade. They do happen infrequently but they do happen.

These are the signs I have detected so far using Spud's MTF Stochastic System:

1. None of the 15/30/1H stochastics should be above 80 when the 4H stochastic crosses below 80 in a short entry. (This can lead to an early entry with price going up instead of down).

2. None of the 15/30/1H stochastics should be below 20 when the 4H stochastic crosses below 20 in a long entry. (This can lead to an early entry with price going down instead of up).

3. Use caution if 2 of the 15/30/1H time frames stochastics are low (below 30) in a long trade or high (above 70) in a short trade when entering as this may draw price away from your intended trade direction.

4. Exit any trade where the 4H has crossed the 80 down, you enter and then the stochastic loops back up to 80....re-enter on the next 80 cross. Vice versa on the 20. Generally this loop is above 61.8 from 80 and below 38.2 above 20. This happens infrequently but can happen without any prior warning.

5. Remember that price moves can be dangerous when a stochastic is above 80 or below 20. Any time frame of all 4 time frames in this position can affect the trade...where a stochastic in the 80-100 range will draw price up and a stochastic in the 20-0 range will draw price down. 90% of failures will happen when this situation exists.

6. When in doubt and up pips...exit your trade! You can never lose if you gain pips. Protect your profit.

Spud (and all stoch lovers), I've setup the new chat temporarily in my web site , so that we can test it before to switch to Fastbrokers one.
The chat is fully customizable so that user could set everything (size text, background, colors, theme and so on..) as preferred.
Hope that my little server could handle all users
http://tinyurl.com/325f9q

Cya in chat

Skyline

Spud,

I think I missed a few posts, so do mind clearing something up for me please?
Are we only entering now when the 4hr either comes down from the 80 (Short) and going up from the 20 (Long)? And prior to this, lets use a short for an example... The 4hr is above the 80 and price is still climbing slightly or ranging. The 15min crosses down through the 50, then the 30min crosses down through the 50, and finally the 1hr falls through the 50... Now we wait for the 4 hr to curl down and penetrate the 80 to enter short?

This is how I'm understanding it. Please correct me if I'm wrong.


Thanks!

Bagovino