Stochastic Trading System - Generating Index Signals
Stochastic Oscillator can be combined with other indicators to form a system. For our example we will combine stochastic oscillator technical with:
- RSI
- MACD
- Moving Averages
Example 1: Stochastic Oscillator Indicator Trading System
Sell Signal Generated using Indices Stochastic System
From our system the sell signal gets derived and generated when:
- Both MAs MAs are moving down
- RSI is below 50
- Stochastic moving downward
- MACD moving downward below center-line
The sell signal was derived & generated when all the Indices rules were met. The exit trading signal is given when a signal in the opposite trend direction is derived & generated i.e. When the indicators reverse.
The good thing about using such a system is that we're using various types of indicators to confirm the Index trade signals and 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 Indices indicator, as a combination of trade signals is better than relying on 1 single Index indicator. The indicator combinations reinforce each other signal, & cancel out false whipsaw signals.
A trend following indicator helps a trader to see the over-all picture, while using more than 1 momentum indicator gives and generates better & more reliable entry & points for exit trading Index.
Example 2: Stochastic Oscillator System
Buy Signal Generated using Indices Stochastic System
For this example the Index 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 Indices whipsaws?
Well, the answer is that by looking at the other indicators like MACD a trader could have avoided the whipsaw, even the MACD had not given a crossover trading signal although it was very close to zero center line level, at the same time the gradient at which the MAs turned wasn't so sharp as to warrant a decisive Index 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'll learn how to identify these whipsaws.
One tip is that as long as MACD is above zero center-line even if the MACD lines are moving downward then the Indices trend is still upwards. As you as a stock indices trader can see from the above example MACD never went below zero line & afterwards the upwards Stock Index trend continued with the MACD maintaining above Zero line and continuing to move upwards.
During ranging markets Stochastic Oscillator will give the fastest signals which are prone to whipsaws. This is why stochastic oscillator indicator is best combined with other indicators & the Index signals traded are confirmed by another one or two other indicators.
Get More Lessons and Topics:
- A Detailed Tutorial to Day Strategy for Indices
- How to Use MT4 Stochastic Indicator in MetaTrader 4 Platform
- NZDUSD System NZDUSD Trade Strategy
- How Can I Add IT40 in MT5 App?
- HSI50 Indices Trading Strategy List & Best HSI50 Stock Indices Trading Strategy to Trade HSI50
- What is NZDSGD Spreads?
