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Spudfyre's Stochastic 5 Minute Trade

  • #41
  • Oct 20, 2008 5:26pm Oct 20, 2008 5:26pm
Quoting skyline
I have to agree too with you Emda, I've backtest on few past days and I cannot see any evidence of profitability in the long run but I'm sure Spud will enlight us with his great teaching ability on how to trade properly this new strategy
Hmmmm....I think I've probably presented this a little too simply and skipped much of the Stochastic fundamentals I use into trading this way. My apologies.

I'll take a few steps back and explain this a little better over the next while.
  • #42
  • Oct 20, 2008 5:34pm Oct 20, 2008 5:34pm
Quoting Spudfyre
Hmmmm....I think I've probably presented this a little too simply and skipped much of the Stochastic fundamentals I use into trading this way. My apologies.

I'll take a few steps back and explain this a little better over the next while.
You don't have to apologies Spud, take your time to explain this trading system in the way you think is better

Cheers,
Skyline
  • #43
  • Oct 20, 2008 5:48pm Oct 20, 2008 5:48pm
In the same way that some of us view a glass a half full or half empty, there are those that believe the long term trends guide the short terms trades. And then there is me. I take the position that the short-term periods build the long term trend.

Please, this is not a forum to debate this. I present this to you because I am going to show you how and why this is, and most importantly how to trade in this mindset.

So, to start we need to understand the different time frames and what they are doing to build the trend, their effect on the existing trend and the most interesting, how we can develop a Predictive MTF Stochastic system.

So, let's start with this 5 minute process and understand a little more about what is happening at the extremes of the Stochastic measurement.
  • #44
  • Oct 20, 2008 6:31pm Oct 20, 2008 6:31pm
Trading with stochs can be very very profitable but you have to know how to read them and that my friends takes a boat load of screen time.

It is also very true that trends always start on the small tfs, but you have to be careful because longer term trends tend to perpetuate themselves.

I am not so sure I like trading the 5 but I so want to learn from the master, as I do need something to do in between my longer tf trades
  • #45
  • Oct 20, 2008 7:01pm Oct 20, 2008 7:01pm
I agree Spud. Class is in session and I have pen and pad and am ready

Quoting Spudfyre
In the same way that some of us view a glass a half full or half empty, there are those that believe the long term trends guide the short terms trades. And then there is me. I take the position that the short-term periods build the long term trend.

Please, this is not a forum to debate this. I present this to you because I am going to show you how and why this is, and most importantly how to trade in this mindset.

So, to start we need to understand the different time frames and what they are doing to build the trend, their effect on the existing trend and the most interesting, how we can develop a Predictive MTF Stochastic system.

So, let's start with this 5 minute process and understand a little more about what is happening at the extremes of the Stochastic measurement.
  • #46
  • Oct 20, 2008 9:08pm Oct 20, 2008 9:08pm
Lets look at this simple basic Stochastic equation:

%K = 100*[(C-L14)/(H14-L14)]

C=closing price
L14 = lowest price last 14 time frames
H14 = highest price last 14 time frames

Looks kinda boring. But let's change it a bit...

2.9851% = 100*[(1.3602-1.3600)/(1.3667-1.3600)

Let's look at this part of the equation (1.3602-1.3600). It tells us our Close price is .0002 above the lowest price in the past 14 time frames. Or in english..."our close is pretty darn close to our low!"

Now look at this part of the equation (1.3667-1.3600). That's our price range over the last 14 time frames. It means that in a period of 5 minutes x 14 periods (70 minutes) price movement was 67 PIPS.

So what we have is a ratio..that ratio is 0.0002/.0067 ...and now you roll your eyes and fall asleep. No wait! It really does get interesting.

Let's get rid of all the zeroes and just make it 2/67. And of course 2/67 = 2.9851%

So, if we made our scale from 0 to 100...we are 2.9851 pips above 0.

So what is so interesting about that?

The range of 67 PIPS is our price volatility. Is that volatility larger or smaller than the previous 14 time periods? Previous 28 time periods? Previous 140 time periods?

Let's say we look at the last 3 groups of 14 time periods and get ranges of 18 PIPS, 35 PIPS and 67 PIPS...we end up with a < shape.
At 2.9% we are right at the bottom of our <.

The next question is how frequently do we see a 67 PIP range? Frequency is a measure of time and distance......ahhhh multiple time frames and PIP ranges!

In a perfect world if we are here <. (we being the '.') and our median is flat than this is a perfect buy long opportunity. Why? Even if our range drops back to 18 PIPS, and we start to get this shape > than we will be here .> and our price will hit the high in the range, higher than our buy and we make PIPS.

So, a %K that is < 10% is close to the bottom of the price range. A %K that is > 90% is close to the top of the price range.

Knowing how to disect %K gives us instant information:
1. What our range is
2. Where we are in that range

So, now that we know where we are and why we want to enter a trade at the bottom of a range or top of a range (i.e. think Bolinger Band trading), we need to know when to enter and when to exit.
  • #47
  • Oct 20, 2008 9:10pm Oct 20, 2008 9:10pm
Awesome so great that Spudfyer is back -

I know a few people that will be very happy to hear this as they were following your threads back in the beginning and were always hoping you would return.

They even kept your chat room going in Trading rooms for ages though I'm not sure if it's still there now.

Those very people introduced me to these great methods and I will be watching with keen interest

Cheers
Time hides Nothing
  • #48
  • Oct 21, 2008 12:29am Oct 21, 2008 12:29am
Quoting Spudfyre
So, now that we know where we are and why we want to enter a trade at the bottom of a range or top of a range (i.e. think Bolinger Band trading), we need to know when to enter and when to exit.
yes I was thinking also about bands... the thing is that sometimes bands are like limites for rebounds.. but sometimes bands are broken and it is a signal to continue going outside the band... same happens in stochs... it can be in a limit of the range but this doesn't mean that price cannot go further and break that range in that timeframe.. jumping into the price action of another timeframe..... I still don't see the reason to consider <10% a good signal.
  • #49
  • Oct 21, 2008 1:31am Oct 21, 2008 1:31am
No - we didn't forget you!
Attached Image (click to enlarge)
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  • #50
  • Oct 21, 2008 6:48am Oct 21, 2008 6:48am
Quoting emda
yes I was thinking also about bands... the thing is that sometimes bands are like limites for rebounds.. but sometimes bands are broken and it is a signal to continue going outside the band... same happens in stochs... it can be in a limit of the range but this doesn't mean that price cannot go further and break that range in that timeframe.. jumping into the price action of another timeframe..... I still don't see the reason to consider <10% a good signal.
Yes, don't get too caught up in the bands, they just saved a few paragraphs about how price moves between the range....that is all. Give me some time....I will get to the point...but I want to show you how we get there.
  • #51
  • Oct 21, 2008 6:48am Oct 21, 2008 6:48am
Quoting Flamenco143
No - we didn't forget you!
Ohhhh..nice pic!
  • #52
  • Oct 21, 2008 7:39pm Oct 21, 2008 7:39pm
What are the reasons to use %K < 10% and >90% in a 5 Minute Chart?

Remember the foundation of building a trend (in my mind), starts with the 5 minute time frame. And I only mention that we use the %K <10% and >90% in the 5 minute time frame.

Stochastics live in a range limit between 0 and 100…and price will never exceed the range limits of the Stochastic. Price will either equal or be within the Stochastic limits.

In any Stochastic time frame chart you can zoom out and see a blur of the %K line moving under 10% and over 90%.

As any traders will point out to you, simply trading the signal of < 10% and > 90% is a quick way to poverty.

As such we use Multi-Time Frame (MTF) Stochastics to know where our price beacon is and follow the lead. In fact, if you ever read anything I post, I am always using MTF Stochastics. I apologize when I started this post I did not make that very clear.

Now let’s get back to the glass half empty or half full debate. Take a look at EUR/USD on Oct 9th at 20:15. Look at the 5 min and 15 min charts to keep MTF simple. From 20:00 on the 5 min chart, we have been building an upward trend and we can see the result of that upward build on the 15 minute chart .

At 20:25 on the 5 minute chart there is a BUY short signal when the %K = 91.667. However, our 15 minute time frame would steer us away from entering this short trade entry. We want to enter a short trade when the 15 minute time frame is headed down…at around 21:05 there is a %K signal on the 5 minute time chart to BUY short and the 15 minute time frame is taking a trip down.

This would probably be considered a high risk entry because the 15 minute Stochastic is still a little high and we would probably like to see the candle at 21:10 of the 5 minute stochastic in the %K >90%. But I believe you can see the way our Stochastics are flowing in this example on the 2 time frames.

The debate of course is…aren’t we following the 15 minute movement to make our 5 minute decision? My answer is no. In order for our 15 minute Stochastic to move down, our 5 minute stochastic has to go down first and it will have to go downwards in 3 time periods to carry the 15 minute %K down . So our decision to enter this trade is on the basis that we believe the15 minute %K is going to move down…and if we believe that than it is a good bet that entry now into the 5 minute trade is a good bet in our favour. If we cheat a little and look at our 1 hour chart we have further confirmation this is a good bet.


In otherwords, if you employ MTF Stochastics or Escalator to Pips and use the %K <10 % and > 90% as signals that the 5 minute time period will move in the way you believe the higher time frames are going to move, than these our sound signals to enter a 5 minute trade. This is because in order for those higher time frames to move in the direction we expect them to move, our 5 minute time frames must build and support that direction.

We use the 10% and 90% areas because %K Stochastic in the 5 minute time period never hovers long in this area. Statistically this hover time in the extreme limits decreases drastically when our higher MTF Stochastics are moving in their trending direction.
  • #53
  • Oct 21, 2008 8:37pm Oct 21, 2008 8:37pm
Hello Spud,

In the above example, what global time zone are you using please?
TTFN Merlyn
  • #54
  • Oct 21, 2008 11:43pm Oct 21, 2008 11:43pm
Spud,

I glad you clarified in the small print that on the M5 chart the %K rarely camps out <10 or >90. I have seen the K line camp in that danger zone while price continues to drop (or sky rockets) a hundred or more pips.

In a certain sense I believe that <10 or >90 is the area where price is showing that it has the potential to hit "critical mass."
  • #55
  • Oct 21, 2008 11:51pm Oct 21, 2008 11:51pm
please comment
Attached Image (click to enlarge)
Click to Enlarge Name: eu.gif Size: 78 KB
Patience is the keyword here...
  • #56
  • Oct 22, 2008 5:46am Oct 22, 2008 5:46am
Quoting Spudfyre
What are the reasons to use %K < 10% and >90% in a 5 Minute Chart?

Remember the foundation of building a trend (in my mind), starts with the 5 minute time frame. And I only mention that we use the %K <10% and >90% in the 5 minute time frame.

Stochastics live in a range limit between 0 and 100…and price will never exceed the range limits of the Stochastic. Price will either equal or be within the Stochastic limits.

In any Stochastic time frame chart you can zoom out and see a blur of the %K line moving under 10% and over 90%.

As any traders will point out to you, simply trading the signal of < 10% and > 90% is a quick way to poverty.

As such we use Multi-Time Frame (MTF) Stochastics to know where our price beacon is and follow the lead. In fact, if you ever read anything I post, I am always using MTF Stochastics. I apologize when I started this post I did not make that very clear.

Now let’s get back to the glass half empty or half full debate. Take a look at EUR/USD on Oct 9th at 20:15. Look at the 5 min and 15 min charts to keep MTF simple. From 20:00 on the 5 min chart, we have been building an upward trend and we can see the result of that upward build on the 15 minute chart .

At 20:25 on the 5 minute chart there is a BUY short signal when the %K = 91.667. However, our 15 minute time frame would steer us away from entering this short trade entry. We want to enter a short trade when the 15 minute time frame is headed down…at around 21:05 there is a %K signal on the 5 minute time chart to BUY short and the 15 minute time frame is taking a trip down.

This would probably be considered a high risk entry because the 15 minute Stochastic is still a little high and we would probably like to see the candle at 21:10 of the 5 minute stochastic in the %K >90%. But I believe you can see the way our Stochastics are flowing in this example on the 2 time frames.

The debate of course is…aren’t we following the 15 minute movement to make our 5 minute decision? My answer is no. In order for our 15 minute Stochastic to move down, our 5 minute stochastic has to go down first and it will have to go downwards in 3 time periods to carry the 15 minute %K down . So our decision to enter this trade is on the basis that we believe the15 minute %K is going to move down…and if we believe that than it is a good bet that entry now into the 5 minute trade is a good bet in our favour. If we cheat a little and look at our 1 hour chart we have further confirmation this is a good bet.


In otherwords, if you employ MTF Stochastics or Escalator to Pips and use the %K <10 % and > 90% as signals that the 5 minute time period will move in the way you believe the higher time frames are going to move, than these our sound signals to enter a 5 minute trade. This is because in order for those higher time frames to move in the direction we expect them to move, our 5 minute time frames must build and support that direction.

We use the 10% and 90% areas because %K Stochastic in the 5 minute time period never hovers long in this area. Statistically this hover time in the extreme limits decreases drastically when our higher MTF Stochastics are moving in their trending direction.
Interesting stuff here Spud , thx again !
If you have the time, could you try kindly to show with some screens your entry/exit so to understand better your point ?

Cheers,
Skyline
  • #57
  • Oct 22, 2008 6:14am Oct 22, 2008 6:14am
Quoting Merlyn
Hello Spud,

In the above example, what global time zone are you using please?
EST +7
  • #58
  • Oct 22, 2008 6:18am Oct 22, 2008 6:18am
Quoting KudzuFX
Spud,

I glad you clarified in the small print that on the M5 chart the %K rarely camps out <10 or >90. I have seen the K line camp in that danger zone while price continues to drop (or sky rockets) a hundred or more pips.

In a certain sense I believe that <10 or >90 is the area where price is showing that it has the potential to hit \"critical mass.\"

Yes, keep in mind we are not entering trades just becasue we see a <10 or >90; we are following MTF Stochastics and triggering our 5 min trade based on our expectation that our 5 min chart will move in the way we expect our greater MTF time frames to move.
  • #59
  • Oct 22, 2008 6:28am Oct 22, 2008 6:28am
Quoting affandiz
please comment
Good example. Except remember we are trading M5 only. However, this is a perfect example of using MTF and triggering our trade at close of 7:25. You'll find support on M15, M30 and H1. Our close was 1.2739 and %K=0 Price shot up to a high of 1.2812...so there was lots of room to grab 10 pips.
  • #60
  • Oct 22, 2008 6:29am Oct 22, 2008 6:29am
Quoting skyline
Interesting stuff here Spud , thx again !
If you have the time, could you try kindly to show with some screens your entry/exit so to understand better your point ?

Cheers,
Skyline

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