Multi Stoch - expanding upon 'Spud's Stochastic Thread Theory'

EDIT: There is a new update available starting from post 181.

This update reflects an "adjustment" made to the overall strategy, offering a simplification as an interim measure while I continue trying to come up with a working indicator for the main strategy that is presented up until that post. Where the main strategy closely relates to SPUD's Multiple Stochastic strategy, the strategy "adjustment" starting at Post 181 relates to what I am call the FIBO STOCH and is a simpler approach with fewer rules and fewer entry / exit conditions.

Additionally, please be aware that in Post 5below, which outlines common Terminology being used, there is an error when describing C1 and C2. As I am unable to edit that post now to correct the error, please be aware that C1 refers to the current candle close, and C2 refers to the previous candle close, and NOT the other way around.

BACKGROUND AND SOME BASIC RULES

Hello FF members.

It is my pleasure to be finally introducing this new thread as a way of further exploring an idea that was originally introduced to this forum by Spudfyre.

All credit goes to Spud for his work. I am merely taking an idea that was his to begin with and further developing it as I understand it. To those reading this who have not been introduced to the basic concept behind the strategy, please go and read The Stochastic Thread Theory, including the .PDF file that clearly explains the strategy outline.

I feel that Spud has hit upon a very powerful idea that has untold potential, and after countless hours of research and analysis, studying his multiple stochastic indicator and its nuances and behaviours, I have further developed the original idea into a comprehensive strategy complete with indicator / alert function that will provide appropriate signals for entry and exit.

Why am I not posting this indicator / strategy WITHIN the original thread? Good question! Whilst the following ramblings are based on Spud's theory, I have taken his original idea and completely turned it into a functional indicator and strategy which incorporates new ideas and additional indicators to make the strategy consistently profitable. As such, it seems appropriate to give this new strategy its own space for discussion, evaluation and development. I don't want to be seen as "hijacking" the original thread, a thread which has a ton of merit in its own right.

I will be "drip-feeding" the information to the thread over several days, because there is simply too much information to be shared in one posting. Breaking it up into small sections should make it easier to "digest".

Finally, when everything has been laid out, I will post the indicators, template and screenshots of trade setups and exits, re-entries and so on. This way there should be a good understanding of how everything should work up front and people don't go blindly downloading the indicator and expecting to earn pips instantly. There is still the need for human analysis - it will not become a pip-producing machine until you understand how it operates.

Before we go any further though, lets cover some of the basics of the thread and the rules that I need to insist upon, for everybodys benefit.

1) Respect:

This system has been designed over countless hours, as previously mentioned. The indicators that are utilised in the strategy do the job well enough to not require further tampering, and there is certainly no need to introduce new ones.

Just like the old saying goes, Why fix it if it ain't broke? So please do not post additional indicators or try to add, modify or change the strategy in any way. Doing so is an insult to the sheer amount of time and energy I have placed in getting to this point. Instead lets just focus on learning the strategy that is presented, share our results and screen-shots from successful trades, and help each other get the most out of the experience, focusing on what is already freely available and not getting distracted.

Having said all that however, if you honestly feel that there is a "bug" in the system somewhere, I am open to you sending me a PM and I will investigate. If I deem your suggestion will enhance the indicator or strategy in some way, I will work on it and post an update.

2) Positivity is welcome - negativity is not:

The lifeblood of any thread is the positive energy and enthusiasm that people bring to it. There is simply no need for negativity of any kind.

Whilst the strategy I am presenting here works perfectly well for me, I do understand it may not work for all; there is no perfect strategy which works for everybody. So if you are such a person and you find yourself wondering what all the fuss is about, rather than offering your criticism and negativity, please just quietly go elsewhere in search of what it is you are after. Negative comments are counter-productive and serve no purpose here.

Essentially, I am referring to the Trader's Code of Conduct, which is available for people to read HERE: (scroll down a little way until you find it).

Next, a little about me and how I see indicators as offering us a certain "language" which we can use to understand the market.

A LITTLE ABOUT ME - CONSIDERING INDICATORS AS A "LANGAUGE"

I have been trading the currency markets for around 12 years.

I have never studied finance or fundamentals and I do not have a clue about how that side of the FX world operates. My take on fundamental analysis is this: I read the FF calendar daily so I know when to avoid trading, i.e. when high impact news releases are occurring.

Therefore, everything you read here is based on my own analysis and research of indicator behaviour over many, many months.

If there is one thing I am good at, it is pattern recognition. As a musician, I understand the importance of patterns, whether they be scales and modes, the circle of 5ths, the need for “dissonance” to “resolve” and so on.

And this is no different to recognising visual patterns as they occur on the screen in front of me. Learning to understand a new indicator is like learning a new language. There are strong visual cues that form an underlying understanding of what is happening in that moment and what is likely to follow. Just like words and sentences convey meaning between us, the obvious behaviours and subtle nuances of an indicator can assist in our understanding of what is happening in the market at a given moment in time, and offer us an insight into what may happen next.

Observing correlations between indicator behavioural patterns and price movement is akin to learning how placing words in a certain order forms sentences, conveys meaning, and ultimately creates understanding and agreement between people. In my view, Technical Analysis should be seen as a “language” that needs to be studied, and only when we are conversant in that language are we able to understand the meaning and engage with it in a way that is ultimately profitable.

As such, an “indicator” is, at least in my mind, simply the market’s way of conveying certain information to you. How well you understand its language will help determine your potential profit.

But, (and there is ALWAYS a “but”), we all know that even with the English language, there are times when concepts become clouded and meaning is not conveyed the way it was intended. And it is no different with an indicator. Your own judgement and understanding can become clouded based on certain factors, internal and external. To be fully conversant you need to be “listening”, or focusing in on what is being said.

Without distraction.

If you want to give yourself every opportunity to be consistently profitable in the market, you cannot allow yourself to become distracted. You need to give yourself the time and space to fully engage in the conversation that is taking place.

Spud’s multiple stochastic strategy offers us a new “language” with which to understand what is happening in the market over time. I have personally found that it offers up reliable information regarding entry, as well as showing us when to stay in a trade so we don’t exit too early.

Up next, a little about Stochastics and its' creator, George Lane.

A LITTLE BIT ABOUT STOCHASTICS

Next, let’s revisit the basic concept of Stochastics and why they are so powerful, and have been a mainstay of the many indicators available to us for over 60 years.

George Lane, known as the “Father of Stochastics”, developed the formula for this indicator in the 1950’s, and successfully traded it until his death in 2004 at the age of 83.

Lane surmised that a change in momentum preceded a change in price direction, using the analogy that if a rocket was hurtling away from the Earth, at some point it would need to slow down before changing direction and falling back to Earth.

Stochastics offer us an insight into changes in momentum, and having a good understanding of Stochastics offers revealing insights into changes in market structure and price behaviour. In this way, Lane referred to Stochastics as a “leading” indicator.

Available for download here is a great article on George Lane which I recommend people to read. It is an interview with Lane which explains a bit of the developmental history of Stochastics, its core principles, how Lane used it in identifying divergence and how he exploited this set-up every day to make his living.

MULTIPLE STOCHASTICS – A NEW FRONTIER?

Next let’s look at the basic concept of Spud’s Stochastic Thread Strategy.

Spud decided on adding 19 Stoch K% lines together, overlaid in the same indicator window, ranging from a fast-moving 6/3/3 to a slow-moving 24/3/3. There have been various versions of this set-up floating around, some colouring the fast-moving group one colour and the slow-moving group another, some colouring each individual line differently.

The overall appearance of the indicator is similar to the Multiple MA “Rainbow” that many traders would be familiar with. And whilst it does have some similarities to this, at least in appearance, there are some very fundamental differences in behaviour.

The MA Rainbow utilises many Moving Averages to clearly illustrate the potential start of a trend by initially having all MA lines “bunched” together and then “fanning out”, the fast moving MA’s separating away from the slower-moving MA lines. An obvious visual separation between the fast and the slow is understood to mean there is a decent trend. When they start to converge again and intertwine, we understand the trend is over and the market is ranging again.

With the Multiple Stochastic indicator, we see a noticeable difference in behaviour. When there is a strong trend developing, there will often be a “bunching” of all Stochastic lines, forming into what Spud called a “ROPE”. All individual Stochastic “threads” become intertwined into a visible rope and they travel together, generally from an overbought to an oversold zone, and vice-versa.

So we see there is a far different behaviour with the multiple Stochastic when there is a strong trend, as all threads band together rather than fanning apart, as in the MA Rainbow example.

When I finally realised the basic brilliance behind Spud’s idea, I decided to try and code an indicator which just offered all 19 Stochastic lines in one instance, rather than having 19 individual instances of the Stochastic appearing in the indicator settings window.

What started out as an innocent project however, became an obsession with needing to “unlock” the workings of this indicator, add in some alert functionality, develop a strategy to trade it successfully…and so on and on it went.

Over 6 months later and here we are. Although I need to reiterate the fact that what I have made available here is only BASED ON Spud’s initial findings. I have developed his idea into my own strategy, which encompasses other indicators in order to make the strategy consistently profitable.

With the original indicator, there are behaviours which were not understood by Spud, which he freely admits in his .PDF file. It is these behaviours which I have spent time analysing, and in doing so, I have identified the need to add in additional filters and smoothing techniques to ensure trades are not entered into unnecessarily, and existing open trades are not closed unnecessarily early.

See the screen-shot which shows the multiple Stochastic, and how patterns and correlations develop between indicator behaviour and price movement.

COMMON TERMINOLOGY and INDICATORS USED

We are getting close to introducing the strategy itself, but first lets get an idea about some of the common terminology that I will be using.

- Each individual Stoch K% line will be called K1, K2, K3 up to K19, where K1 = 6/3/3 and K19 = 24/3/3;
- K AV refers to the averaging of all 19 Stoch K% lines;
- FAST K AV refers to an averaging of the FAST K group, K1 to K10;
- SLOW K AV refers to an averaging of the SLOW K group, K11 to K19;
- D refers to the D% line. The default value is 12, but can be altered in the settings;
- ROPE refers to the banding together of all individual Stochastic threads into a single unit, which then travel together in the same direction in a tight-knit fashion. When they begin to separate the rope can be seen as losing momentum. The basic formula I have arrived at suggests that a ROPE is valid when ((K Range) < X), where X is a user defined value. The default setting for X is 1;
- K Range refers to the value differential between K1 and K19, which is useful when determining whether a "ROPE" is valid or not;
- OBX refers to the Overbought level line, where X is a user-defined value, default is 80;
- OSX refers to the Oversold level line, where X is a user-defined value, default is 20;
- C1 and C2 representing Candle 1 (previous closed candle) and Candle 2 (current closed candle).

THE INDICATORS USED

Next, lets examine the indicators that are included in the strategy, and their function.

1) The multiple Stochastic.
This is just the plotting of all 19 K% Stochastic lines, 6/3/3 to 24/3/3, and the D% signal line (default value 12). All lines are individually coloured to offer an easy visual roadmap.

2) The 20 Period LWMA Bollinger Band
I am using the 20 period Linear Weighted Bollinger Band centre line (BBCL) to assist with trade entry and exit. If price breaks above this level, then one out of several trade entry / exit criteria are met.

3) The 20 period Smoothed MA
I am using a 20 period Smoothed MA to assist with trade exit. If the data value of this MA shows a change in direction during a trade, then one out of several exit criteria are met.

4) Pivot Points and the Daily Open line
Pivot Points and the Daily Open line are mainstays of any strategy that I use. Pivot Points are a great way of targeting a potential Take Profit level, as well as filtering out a trade when price is already in close proximity to these levels, i.e. I would not BUY when price is immediately below a PP.
The Daily Open operates in the same way, however it also offers additional sentiment, i.e. if price is below the Daily Open, I may choose to only consider SELL trades.
These are the basic indicators that are used in the strategy, and the interaction between all of these form the basis for BUY and SELL alerts, which we will cover next.

When all of these are placed on the screen it should look like the screen-shot below:

THE STRATEGY - BUILDING A CASE FOR ENTRY AND EXIT

(N.B. The following strategy setups / formulas are for BUY trades only).

There are various trade set-ups that are critical when identifying when an entry is valid or not.

Essentially, we must consider ourselves as a Prosecutor in a Court. In order to win, we need to slowly and carefully build a case. And to build a successful case, we need evidence. So essentially, this strategy is all about building a case to enter a trade, and the evidence we are searching for comes to us automatically by way of a series of alerts as certain trade entry criteria are met.

The evidence we need to build a case on for trade entry are:

1) When C1 ((SLOW K AV < D) AND C2 (SLOW K AV > D)
This initial alert identifies the first piece of evidence we need, where all Stochastic threads are grouped in an oversold zone on one candle, and then by the next candle close the SLOW K group has risen above the D signal line.

VISUAL ALERTS:
- Vertical WHITE line in the indicator window
- thickness = 1
This suggests a change in momentum from bearish to bullish, but we are not going to win a case on this piece of evidence alone.

2) SLOW K AV > OSX
This second alert identifies the second in the series of setups, where the SLOW K group has risen above the Oversold level line. This is further confirmation of bullish momentum building, but again it doesnt solve our case.

VISUAL ALERTS:
- Vertical GOLD line in the indicator window
- thickness of 2

3) When D > OSX
The third piece of evidence appears when the D signal line rises above the Oversold level line. This is a great piece of evidence, and we are in a winning position, but we still need more KEY evidence in order to win our case for entry.

VISUAL ALERTS:
- Vertical DARKORANGE line in the indicator window
- thickness of 3.

4) The ENTRY criteria.
There are a number of pieces of evidence required here, so lets break them down one at a time.

- (KAV > 50)

This suggests that the K AV is climbing and has breached the mid-level 50 line. Stochastics are closely related to the RSI in the respect that if the K% value crosses the 50 line it signals bullish momentum.

- FAST K AV < OBX

This suggests that the FAST K AV group has not travelled beyond the Overbought level line into the Overbought zone. Doing this would taint our evidence, and invalidate a BUY ENTRY setup.

- PRICE > Bollinger Band centre line (BBCL)

The current price level must be above the centre line of the Bollinger Band. The Bollinger Band utilises the 20 period LWMA for its calculation.

- C2 BBCL > C1 BBCL

The current candle close Bollinger Band Centre Line (BBCL) value must be greater than that of the previous candle. We do not want to be buying into downward momentum, which is suggested by a downward sloping BBCL, regardless of what all other signals are telling us.

VISUAL ALERTS:
- Vertical line LIME (BUY) or RED (SELL) in the indicator window
- thickness of 5.

TIME TO PROVE YOUR CASE FOR ENTRY!

That is all the evidence you need to be able to win a case for trade entry. It may seem like a lot, and perhaps it is, but no case in history ever deserved to win without first crossing all the T's and dotting all the I's.

Just like a Courtroom however, not all cases are going to win. There are factors that go on behind the scenes that we may neglect to consider and all the evidence we collect may not be enough to cover everything required to secure a successful outcome. One of these factors is what is happening on a higher time frame, but we will get to that later on.

In short, losing cases is part of the life of a Lawyer, just as losing the occasional trade will happen to every Trader. At the very least our strategy needs to be designed to give ourselves the best possible chance of winning, and at the same time mitigate the potential for loss. This means identifying setups that are more likely to be profitable, and trading these rather than setups which are less likely.

Over the longer term, the entry criteria listed here for this strategy should outperform a scenario where one or more pieces of evidence were missing.

The following series of screen-shots will illustrate each step of the trade as setup criteria are met.

Please delete this thread. It is simply too valuable.

The following series of screen-shots detail a quick scalp on the M1, from setup to entry (exits will come later).

Screenshot showing setup alert 1 - the Average of SLOW K% has risen above the value of D%

Screenshot showing setup alert 2 - the average of K% has risen above the oversold line. Momentum is changing, which can be seen as preceding a possible change in price direction.

Screenshot showing setup alert 3 - the D% has risen above the oversold line.

Screenshot showing setup alert 4 - the final in the series. All evidence is gathered and we can prosecute our case for entry.

The average of K% has risen above the mid-level 50 line, price has broken above the BB centre line, the BB centre line has started to rise, and the average of FAST K% has not gone beyond the overbought zone.

Notice how the Stochastics dipped back below into the oversold zone before finally rising again...this is why we have this series of setups, and we don't enter too early, potentially into a losing trade.

While the above trade example is a quick scalp of the 1 minute and offers only 8 pips at the maximum, these setups occur time and time again across all time frames and therefore will suit all traders regardless of their trading style. Personally I scalp using the M1 for entry along with the M5 or M15 for additional trade direction information.

But multiple time frame analysis will be covered at a later time. That's enough for now...back tomorrow with more.

Hello
Please post the indicators

Multi & MTF Stoch is my fav tool, and it's all about the patterns

subscribed.

Thank you Kirk, can already tell this will be big. Subscribed. Was worth the wait!

Great work! Thanks Kirk! Hope to see more soon

Thanks,

TheJube.

When will your YouTube video go public so we can get a better understanding of this system?
Thanks

Little patience ... The thread was opened just few hours ago.

Putting pressure on the OP is the best way to kill a thread ...

Nah, pressure creates diamonds. Self appointed police men kill a thread.