Stochastic System

This lesson should be called: Combining Stochastics with other Technical Indicators, but Stochastic System sounds real nice.

Stochastic Oscillator Indicator can be combined with other indicators to form a system. For our examples we will combine it together with:

RSI
MACD
MAs Moving Averages Index Technical Indicator

Example 1: Stochastic Indicator Trading System

Combining Stochastics with Different Types of Indices Technical Indicators

Sell Indices Signal Generated using Stochastic Indicator System

From our trade system the sell stock signal is derived and generated when:

Both MAs are moving down
RSI indicator is below 50
Stochastic heading downward
MACD heading downwards below centerline

The sell stock signal was generated when all the indices rules were met. The exit stock signal is derived & generated when a trade signal in the in the opposite market trend trend trend trend trend trend trend direction is generated/derived i.e. When the indicators reverse.

Good thing about using such a stock system is that we're using various types of indicators to confirm the trade signals & avoid as many whipsaws as possible in process.

Stochastic - is a momentum oscillator technical indicator
RSI- is a momentum oscillator technical indicator
MAs Moving Averages Technical Indicator- is a market trend following trading indicator
MACD- is a market trend following trading indicator

It's very helpful to combine more than one stock indices trading indicator, as a combination of signals is much better than relying on one single technical indicator. The stock indicator combinations re-inforce each other signal, and cancel out false whipsaw stock signals.

A trend following indicator helps a stock index trader to see the overall picture, while using more than 1 momentum stock indicator generates better & more reliable entry and points to exit trading indices.

The stock indicators combinations & their signals help to decipher a lot of the stock trading market activity.

Example 2: Stochastic Indicator Trading System

Buy Indices Signal Generated using Indices Stochastic System

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

Well, the answer is that by checking-on the other indicators such as and like MACD indicator a stock index trader could have avoided the whip saw, even the MACD indicator had not given a crossover stock trading signal although it was very close to the zero center-line level, at the same time the gradient at which the moving averages indicators turned was not so sharp as to warrant a decisive stock market trend reversal. Well the thing is that it’s not so obvious when it comes to recognizing stock market whipsaws: it's a skill which takes some time to master but after some time you as a stock indices trader can spot whipsaws from a mile away.

One tip is that as long as MACD indicator is above zero center line even if the MACD lines are heading downwards then the trend is still upward. As you as a stock indices trader can see from the above example MACD indicator never went below the zero line and afterwards the upward trend continued with the MACD indicator maintaining above Zero-line and continuing to move upwards.

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

Get More Tutorials and Lessons:

Trade Stock Indices

Stochastic System