Stochastic Strategy

I am testing a strategy and I thought it would be of interest to members if I post the results of each trade in this thread as they progress from analysis to exit (win or lose).

Documenting the strategy like this will force me to formulate a formal trading plan due to the public exposure. (An area I tend to fall down in).
The test will run for 100 trades, which I estimate will last for approximately six months. The goal at the end of the test is to have a positive balance of 1,000 pips.

The D1, H4, H1 and M15 timeframes will all be traded and all currencies will be traded as long as they meet the selection criteria.

Chart Setup
A candlestick chart is used along with a 50 SMA and a stochastic indicator set to 5, 3, 3. The overbought and oversold areas will be set to 20 and 80.

A 50 SMA moving average is placed on the chart to calculate a slope value. This value is then used as part of the currency selection criteria. The value is the difference in pips between the 0 bar and the 19th bar (20 bars total) of the SMA. The usage of the slope will be made clear in each trade setup description.

A range value between high and low bars is also used in the selection criteria. This value is the difference in pips between the high and low of bar 0 to bar 14 (15 bars total). The usage of the range will also be made clear in each trade setup description.

Strategy
The strategy is rather simple but will differ slightly between some of the timeframes.
As settings change during the testing process they will be documented here. In particular I imagine the range and slope values will change.

General Currency Selection (all timeframes and all currencies)
For any currency to be considered and put on the watch list as a possible trade in any timeframe its price must meet the following 2 criteria:
1. Spread must be less than 4 pips
2. Stochastic must be in the overbought/oversold area.

D1 Timeframe Selection (All currencies)
For any currency to be considered and put on the watch list as a possible trade in the D1 timeframe its price must meet the following criteria as well as the criteria in the General Selection section:
1. Slope must be at least 5 pips in the direction of the intended trade.
2. Range must be at least 80 pips.
3. Make a note the first support or resistance area.
4. Make a note the second support or resistance area.

H4 Timeframe Selection (All currencies)
1. Slope must be at least 25 pipsin the direction of the intended trade.
2. Range must be at least 50 pips.
3. Note the first support or resistance area.
4. Note the second support or resistance area.

H1 Timeframe Selection (All currencies)
1. Slope must be at least 20 pipsin the direction of the intended trade.
2. Range must be at least 40 pips.
3. Make a note the first support or resistance area.

M15 Timeframe Currency Selection (All currencies)
1. Slope must be at least 5 pips in the direction of the intended trade.
2. Range must be at least 20 pips.
3. Make a note the first support or resistance area.

Trade Entry
Once a possible entry has been established we then watch the currency for a possible entry.

General Entry Condition (for all trades)
All trade entries must meet one of the follow
1. A price action entry. E.g. Pin bar or Engulfing bar or
2. Price to move from the overbought / oversold area (with attitude).

D1 and H4 Entry
D1 and H4 trade entries should meet a condition in the General Entry Condition section including the following.
1. The lot size should be broken into two separate trades or
2. The Initial Stop is set to 2 pips past the high / low of the current swing. (Some discretion may be needed here)

H1 and M15 Entry
H1 and M15 trade entries should meet a condition in the General Entry section including the following.
1. The lot size for H1 and M15 is left as a single trade or
2. TP is set to 2 pips plus spread past the high / low of the current swing. (Some discretion may be needed here)

Trade Management D1 and H4
1. Close the first lot at the first support / resistance area and move the second lot to break even.
2. Close the second lot at the second support / resistance area.

Trade Management H1 and M15
1. Close the entire trade at the first support / resistance area

Notes:
The initial range and slope values are random and not based on any passed data. Hopefully as trades are processed these values will have more meaning.
Not all trades need to be taken. Avoid entering trades into support or resistance. If you are not comfortable with the entry stand aside as there will be lots more opportunities.

If I haven't been clear in my description then ask away.
Your input will be most welcome.


John

Hello John,

Have you ever tried using the Stochastic with Williams %R? This combination works a treat!

Ridwan

Hi Ridwan,

No I haven't. Can you explain how it is used?

John

I look for oversold and overbought regions on both Williams and Stochastic oscillators.

My entry rules are:
(1) Wait for signal to touch or crossover the 20% and 80% levels on the Williams % Range as entry/exit points AND
(2) The stochastic indicator should be in (or very close to) the oversold/overbought region (20/80% levels)

My exit suggestions are:
Wait for either the Williams %R to reverse to the opposite level OR the Stochastic to reverse to the opposite level, whichever comes first.

I get best results on 4-hour trading. You can use other confluent patterns such as price action, 2 bar reversal, engulfing bar, support & resistance levels etc for entry/exit, in addition to the ones mentioned for this strategy.

To clarify here's how I would use this strategy to enter a long or short trade.

For a long trade:
Entry: Wait for upward crossover (or touching) of the 20% level on the Williams %R and also ensure that the Stochastic is below (or close to) the 20% level. If the signal has dipped below the 20% level in the Williams indicator, wait for it to cross over and close above the 20% level before taking a long. (Note that best probability is when the signal actually crosses below the 20% level rather than just touching/coming close to it).
Exit: Wait for signal in the Williams indicator to hit or crossover the 80% or wait for Stochastic signal to get close to or crossover the 80% level, whichever comes first. Alternatively, exit at known support/resistance levels.

For a short trade:
Entry: Wait for downward crossover (or touching) of the 80% level on the Williams %R and also ensure that the Stochastic is above (or close to) the 80% level. If the signal has shot up beyond the 80% level in the Williams indicator, wait for it to cross over and close below the 80% level before taking a short.
Exit: Wait for signal in the Williams indicator to hit or crossover the 20% or wait for Stochastic signal to get close to or crossover the 20% level, whichever comes first.

The strategy identifies when reversals/retracements are imminent without any prior knowledge of SR. I can even trade counter-trends with good confidence.

This is my "conservative" way of using the strategy and it might take a long time before an opportunity shows up, especially on the 4H charts. I also use this strategy in a more relaxed manner that allows me to get more trading opportunities but it is slightly more risky but much more rewarding. I have been using this strategy since the beginning of this month and so far I've had a 100% success rate on the 10 trades that I took in the demo account that is linked here. In my live trading, I got 23 trades out of 25 using this strategy.

It's still early days and I will test it a bit more to get a fair evaluation of its potential but it's looking good so far.

Ridwan

maybe what you mean is -20 and -80 level om Williams% indicator?

Yes sorry they are the -20/-80% levels

sounds nice with williams.

Question, what are your settings?

can u post some charts?

I have to admit that I have no idea what you are really talking about, however, I do know about stochastic indicators. The slope thing and pip distance is really confusing because I do not measure how many pips the market moved before I decided to enter. Actually that sounds really time consuming.

Using a 5/3/3 stoch means you are simply tracking the movement of price against the 5 SMA. The 20-80 represent your upper and control limits for how far price moves from the 5 SMA. At the 50 stochastic line, price will be crossing the 5 SMA on your chart.

I made you a pic of how the 5 stochastic would look if you tracked them simultaneously on your 15M chart. You have to use the lowest time frame to get a result. In the pic the 15M is white, the 1hr is yellow, the 4hr is blue, and the daily is pink. This way you see the effect of price movement around the 5 SMA on all 4 time frames.

Again, I am totally perplexed about counting pips and making slope calculations before entering a trade. I am also very suspect that the 5 SMA is going to show you consistent profit. It is a bit volatile, therefore, head fakes will be common.

Now, if counting pips is a big deal for you, you might consider using renko or constant range bars and that way you can easily see when price has moved 14 pips or whatever you defined. Renko bars set to 14 will start a new candle when there are 14 pips. It will save you from doing a lot of calculations. It will also help you enter faster when the market gives you 14 pips before your number of bars needed requirement.

Sorry, it sounds flawed to me. I am not really seeing your full thought here. Just trying to help you determine if it is worth pursuing or not. The attached pic shows you the decision-making you are creating here and you can decide for yourself whether or not this is viable.

A very good understanding of stochastics. I also use stoc, but don't take 20/80% seriously. Stochastics is a powerful indy when using multi-time frames -- I trade on 1h monitoring 15m, 4h, and daily charts.

If you want to incorporate stoc in your system, Spudfyre is worth reading.

Good luck

Thanks. I looked at some of his threads and I could have saved him a lot of time if I had known what he was doing All he really needed to do was look at the code and see the alignment of the stoch settings to the corresponding MA. All it is doing is showing a range between the upper and lower control of the MA. That is why his screenshots look like rainbow MA's...because they are. He just moved them from the chart to an indicator and made them range to the limit capabilities of the indicator.

Since stochs are just measuring ranges of moving averages, then it is my opinion you should find the one key moving average the market behaves to and use it for defining your indicator ranges. As far as stochs are concerned, since they have a tendency to maximize their upper and lower ranges and therefore stop providing price expansion data, then you need to do a few things to make them effective. One, if the market is ranging around equilibrium, then a stoch with that value is useful for finding the top and bottom of the movement. If the market is trending however, you need to change the %D...well you should do that anyway...to some factor of %K. If you use 20 for %K, the %D should be 10, or 20, or 30, etc. The other alternate use is to convert your time frame equilibrium moving average to a higher time frame by multiplying your stoch value to that time period. For instance, if you trade 1hr charts, and use stoch 20, then you should use %K 40, or 60, with a %D of 20, or 30. This allows you to know what direction the market is moving in the higher time frame, so you are less prone to head fakes. If you ignore trading signals that are opposite the modified stoch, then you will normally trade in the market direction and not against it. It will also help you eliminate other time frame charts so you can make decisions easier.

Just my advice. Believe me I have created similar techniques before, but I didn't really put 2 and 2 together with the coding back then. While rainbow stochs look pretty, they are pretty AFTER they have formed. Using the advice I just told you, you can trade as it happens with the above technique. Having the higher setting stoch will allow you to delete some charts. I understand you might be a little uneasy without a gazillion bits of information, but really it will prompt you to take more trades and make more money by narrowing your focus. Additionally since it simplifies your analysis, then eventually you can trade multiple currency pairs at once because you will not need 4 charts open on each pair.

Of course, if you MUST use multiple stochs, then consider placing them on top of each other and make your %D equal to 1 with color NONE. It will save you chart space. IF you are using any other indicator keyed to moving average arrays, then I suggest just using one stoch with a setting of your equilibrium moving average times 2 or 3 for %K and then divide that in half for %D. Since nearly every indicator is written against moving average arrays, you can use any other indicator to replace the stoch for your time frame. There are many indicators with better ranges than stochs, so that is actually to your advantage. In time, you will realize you don't even need a stoch indicator, lol, because there are other indicators that will more easily show you tops and bottoms. But I understand the stoch is comforting if you are used to seeing it

Oh, in case you didn't figure it out yet You mentioned stochs are great mtf indicators. Hopefully you understand what I wrote? When the %K crosses the 50 line it is in direct proportion to the corresponding moving average, dependent on how much slowing you are using. A 5/3/3 stoch is monitoring the 7 period SMA. Slowing is 3, so 1 is equal, making it plus 2. So each time price crosses the 7 SMA, the stoch crosses 50, more or less. In other words, if you convert the stochs from your other time frames into their values for the 1hr time frame you trade from, then really you could just put those moving averages on your chart. Let's say you use 5s like skinner does. Do you want to trade the 5 or 7 SMA? To make it simple, let's say 5. So, first you need a 1 period SMA because to see the 15M 5 SMA you need to divide by 4. Next, multiply 5 times 4 to get 20, so now you see the 4hr chart. Then multiply to find the daily 5 SMA, which would be 120. So you can use stoch 1, 5, 20, 120...or just use stoch 5 and put SMA 1, 5, 20, 120 on your chart. When price goes above or below those SMAs, it is the same as crossing the 50 line of their corresponding stoch indicator. Or the 0 or 50 line of almost any other indicator.

To demonstrate what I mean, I opened a EURUSD 1hr chart. I took the 5 stoch and made it a 15, so I am trading the 3hr signal from a 1hr chart. I changed %D to 8, which is a little more than half of 15. Using the 50 line of the stoch, or yellow line on the chart as the entry...and the yellow/blue crossover of the stoch as the exit, this is what it looks like. The pink line on the chart is your 5 SMA. You can see that it is not ideal, but profitable. Even with this technique though, the stoch still has a questionable exit area. You don't need multiple stochs, but of course, it is your decision. The attachment is merely an example of what I am talking about. I have no idea of its actual effectiveness because I do not use these values, nor trade the EURUSD, nor use 1hr time frames for anything. Just offering an alternative to chart overload.

Hope this helps. Good Luck.

Thanks for the comments everyone.

Forexgogo, Spudffyre has some very interesting ideas.
http://www.forexfactory.com/showthread.php?t=119483

Thanks for the pointer

I thought I would show you the difference when you use the stoch indicator as an equilibrium definer. For this example, I am still using the 15 period %K and %D is still 8. Now however, I am using it as equilibrium and monitoring its upper and lower control limits. I still do not recommend these settings as ideal because once again, I do not concur this is equilibrium. It is just an example. Same chart as the last screenshot, but now using probability through the stoch indicator. This is the main difference between what you propose and what I do. Hope this provides you a better understanding of how to get an edge in trading

dkrock,

Your thoughts are very much appreciated

John

Interesting. You should make an EA.

dkrock,

Pretty heavy stuff. I think I am somewhat out of my depth here so I will be rethinking this whole thing.

John

See the area where I show 67 pips? The stoch is sitting on itself. That pattern would cause an EA to open/close/open/close itself over and over. You would need a confirming indicator that shows you when the stoch is done being lazy

I think you can filter entries easily. For example, you filter out the cross above/below 80/20%.

Dkrock, thanks for the insights on stochastic use. Very helpful!

I don't want to discredit your idea, but you have to remember an EA is a computer signal. It does not know if it is right or not. It only does what you tell it do every time without any common sense.

Depending on your stoch settings, there are a great number of times it can cross 80 or 20 and not mean anything to overall market movement.

It is a great idea, but you have to review those ideas carefully. The EA has no common sense. A head fake will destroy your account.

That is exactly the point of using EAs, isn't it? A computer doesn't care about your discretion/common sense that is sometimes very emotional.

No, I don't mean to criticize your trading philosophy against EAs. I don't use EAs, either.

But EAs could be profitable when you use them wisely -- EAs are sometimes better than humans dealing with the stop loss.

BTW, I use stochastics, but only watch when it turns the directions. (don't care about % or crossing). All I see is correlation between stoc turns and the price action.