In my previous post, I discussed the classic Stochastic Oscillator, its calculation interpretation and conventional usage.

This post will discuss my particular usage of the Stochastic Oscillator.

First and most importantly, I do not use %D. I use instead three iterations of %K.

My Stochastic Oscillator system consists of:

1. One 7 period fast %K – represented by a red line.

2. One 28 period Slow %K – represented by a green line.

3. One 84 period Slow %K – represented by a blue line.

I do not do this just to be different. But my reasoning is subjective and my version of the Stochastic System was derived empirically. I have been trading from many years and over that considerable period of time I have looked at more charts than I care to remember. Slowly I came to the conclusion that the conventional signal line used for the Stochastic Oscillator simply did not work for me – no matter how may %K periods I used.

However, the Stochastic Oscillator remained a very good overbought oversold indicator – it just produced too many signals that were not worth my time to check them out.

So I developed another signal – what I call an extremely overbought/oversold signal. This alert tells me when the red line has reached its max and has crossed green line moving in the opposite direction while the green line AND the blue line are still at extreme values. Even this alert cannot be traded without other confirmation; however the signals are really good often enough to make it worthwhile to check each of them.

An interesting aside, pointed out to me several years ago, my Stochastic Oscillator system seems to align with lunar cycles of 28 days. I did not really think about that since I developed my version empirically, over a large span of time. However, overbought and oversold is a psychological state of mind of the market and the moon is well known to affect psychology.

So who knows, maybe the lunar cycle is important. I truly believe it is important in human psychology. I have long related my biorhythms to lunar cycles. So maybe the collective psychology of the market is also related somewhat to lunar cycles.

Maybe I can get a big fat government grant to study the phenomenon.

Figure 1 US Bond 6000 Ticks Per Bar.

The above chart is the same chart used in the previous post but with my custom Stochastic Oscillator substituted for the conventional Stochastic Oscillator.

I usually have this indictor plotted in a sub-graph above the price bars but left it below for this post because the previous post had the Stochastic Oscillator plotted below price.

Note that my alert has identified two possible trades, the first one a buy and the second one a sell. In retrospect, either would have been a very good trade.

My Stochastic system is very good at telling me when a market is overbought or oversold – and it occasionally it also tells me when that market is about to reverse and move in the opposite direction. I completely trust the first bit of information and I always look at my system carefully when the second signal is sounded. I just do not trade that signal alone. I have other indicators that help me confirm the probable change in price direction. There is absolutely no single indicator signal that can be reliably traded – at least that is my opinion.

 

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