Stochastic Trade System - Generating Stock Trade Signals

Stochastic Oscillator indicator can be combined with other indicators to form a system. For our example we will combine stochastic oscillator indicator with:

• RSI
• MACD
• Moving Averages

Example 1: Stochastic System

Sell Signal Generated using Indices Stochastic System

From our trading system the sell signal is generated when:

1. Both MAs Moving Averages are moving down
2. RSI is below 50
3. Stochastic moving downward
4. MACD moving downward below center-line

The sell signal was generated when all these Stock Indices rules were met. The exit signal is generated when a signal in the opposite direction is generated i.e. When the technical indicators reverse.

The good thing about using such a system is that we are using different types of indicators to confirm the Stock trade signals & avoid as many Indices whipsaws as possible in the process.

• Stochastic - is a momentum oscillator indicator
• RSI- is a momentum oscillator indicator
• Moving Averages- is a trend following indicator
• MACD- is a trend following indicator

It is very useful to combine more than one Stock Indices indicator, as a combination of signals is better than relying on just a single Stock Indices technical indicator. The indicator combinations reinforce each other, and cancel out false whipsaw signals.

A trend following indicator helps a trader to see the overall picture, while using more than one momentum indicator gives better & more reliable entry & exit points for trading Stock Indices.

Example 2: Stochastic System

Buy Signal Generated using Stock Indices Stochastic System

For this example the Stock Indices trend is clearly upwards, but at some point there were a few Indices whipsaws generated by the stochastic oscillator indicator, can you spot them? So the question is how can a trader avoid trading these Stock Indices whipsaws?

Well, the answer is that by looking at the other technical indicators such as MACD indicator a trader could have avoided the whipsaw, even the MACD indicator had not given a crossover trading signal although it was very close to the zero center-line level, at the same time the gradient at which the moving averages turned was not so sharp as to warrant a decisive Stock Indices market trend reversal. Well the thing is that it’s not so obvious when it comes to recognizing market whipsaws: it's a skill that takes some time but after some time & practice you will learn how to identify these whipsaws.

One tip is that as long as MACD indicator is above zero center-line even if the MACD lines are moving downward then the Stock Indices trend is still upward. As you can see from the above example MACD indicator never went below zero line & afterwards the upwards Stock Indices trend continued with the MACD indicator maintaining above Zero line & continuing to move upward.

During ranging markets Stochastic Oscillator indicator will give the fastest trading signals which are prone to whipsaws. This is why stochastic oscillator indicator is best combined with other indicators & the Stock Indices signals traded are confirmed by another one or two other indicators.