space
red
space Traders Wheel
gray
20 Golden Rules
for Traders
gray
red
Trading Tactics
tran
NEW TO TRADING & TECHNICAL ANALYSIS?
tran
Click Here
tran
red
space
TACTICS
TUTORIAL
Home
Daily
Courses
Wizards
Resources
space
red
space
 
YOUR DAILY
MARKET
GUIDE
Morning Trader
Featuring
Tour The Bells
Interactive
Trading
Picks
space
PICKS, CHARTS, SCANS, IDEAS & PROFITS
space
Check out
MORNING TRADER
NOW!
space
and
EVERY MARKET DAY!
 
TRADING THE STOCHASTICS INDICATOR

I used to think only price bars could predict the future. I started as a novice, experimenting with every indicator in the book. I could never get the markets to match my mathematics, so I finally gave up and became a pattern reader. In fact, my early writings are so pattern-centric they appear intolerant of all other trading techniques.

I've had a change of heart in recent years because of a tool that's saved my neck on a ton of trades -- the overused and underappreciated stochastics.

What exactly is the stochastics oscillator? It may seem like a simple question, but the answer isn't. The term describes a mathematical process that has an infinite progression of random variables. Let's dumb it down a bit. Stochastics measures how a market closes each price bar relative to its range over time.

This is urgent information for all types of traders. Scalpers use it to read the tempo as money flows through their one-minute charts. Investors use it to identify cycles as weekly stochastics alter the balance of power. But this valuable tool won't give up its secrets easily, and it requires thoughtful interpretation.

chart

The settings you choose don't matter because stochastics print valid patterns with any set of inputs. Different settings will emit different levels of "noise" in the subsequent output. For example, notice how the five-, 13- and 21-day settings on the PetsMart chart affect crossovers at key turning points.

The approach here is to match your inputs with your trading style. For example, daytraders capitalize on subtle shifts in market direction and will benefit from short-term settings. On the other hand, long-term settings help position traders avoid false signals.

chart

Many traders get fooled when stochastics flip to an extreme because they look for a reversal instead of trend continuation. Ironically, the most dynamic price movement often takes place right after these levels are breached. So how do you avoid bad signals and use stochastics for its intended purpose? Look at the unique patterns.

The stochastics middle ground tells you the trend is your friend. Watch when the fast line pulls away from the slow line in this zone. This reveals increasing momentum in the direction of the short-term trend.

How can you use this information? Look to buy on the dip (rising) or sell on the bounce (falling) as long as the indicator doesn't roll over. One effective variation of this pattern is a 1-2-3 move where the indicator thrusts out of one extreme, pulls back a little and then thrusts again.

chart

Take advantage of the price surge when stochastics break into an overbought or oversold level. Watch for the fast line to thrust away from the slow line right here. This tiny signal often corresponds with a final burst of buying or selling before a market reverses or goes flat. It corresponds with the profitable fifth wave parabola in Elliott Wave Theory.

chart

Stand aside when stochastics flatline across the top or bottom of the indicator plot, but act quickly when they start breaking in the other direction. This Mesa reversal signal is often timed perfectly with the break of a key support or resistance level. One problem is you can't tell how far a move might carry from the indicator alone. Look at the price pattern to find natural targets for the subsequent swing.

chart

My favorite oscillator patterns are double-tops and double-bottoms. As with price bars, I look for a lower second high to signal a top, and a higher second low to signal a bottom.

Be patient when this pattern develops and let the lines drop away from extreme levels to confirm the signal. This pattern is similar to the Mesa reversal described above, but with one key difference -- it often triggers more follow-through on the subsequent pivot because it reflects more underlying divergence.

 
Hard Right Edge Recommends:
Low Commissions/Excellent Service:
We Strongly Recommend CyberTrader as your professional trading solution.
 
 
DST
 
red
space
POWERFUL
ONLINE
TRADING
COURSE
From
HARD RIGHT EDGE
mtt
Your
Original Guide
to
Successful
Short-Term Trading
space
Highly Effective
Market Strategies
and
3-D Charting Techniques
space
Get
More Info
space
red
space
McGRAW-HILL PUBLISHERS
presents
space
Trading Skills
for a New Generation
space
Hard Right Edge Founder
Alan S. Farley
The Master Swing Trader
ORDER NOW!
 
Targeting Profitable Entry & Exit Points
ORDER DVD VIDEO!
 
ALL-NEW AND FULLY-REVISED
Mastering The Setup
THE COMPLETE
CD-ROM GUIDE
TO THE 7-BELLS
 
red
 
All original materials: © 2005 Brooke Publishers, Inc.
Comments: trader@hardrightedge.com