Stochastic Trend Following Strategy

Anybody using stochastic out there? What are your results? Got any Tips?

Really? Nobody uses stochastic here? As a tool for day trading it is invaluable, it provides trend following signals, indicates possible tops and exit points with divergence, predicts break outs through convergence and is a top notch confirming indicator if you focus on some other tool.

Seems that you know some things about it yourself…maybe people get interested in the thread if you share your experiences first…e.g. how do you use stochastics?

What’s an example of a trend-following STOCH signal?

I do and I will, I tried to post a link an article I wrote outlining my simple strategy but I think it got moderated. I’ll be back later to add some more but here is a little teaser/intro.

Stochastic is a an oscillator indicator rooted in randomness and based on the same principles as chaos theory, random walk theory and Brownian motion. The indicator assumes that it is impossible to predict which the way the market is going to move on a tic by tic, candle by candle or day to day basis. However, overtime, the randomness will present a pattern from which predictions can be made. Much like a man walking a dog…the dog may jump side to side as its attention goes from one thing to another, while doing so it may pull the man off track a little this way or a little that way. It is impossible to know which way the dog will jump next but you can be relatively certain, based on the direction in which the man is walking, on where the dog is going to end up, over the longer term.

i think you only can post links after a certain amount of posts…but i don’t know the exact number…

Yeah, I thought I had reached the limit but maybe not…Anyway, here goes again. This article is about stochastic and how it can be used for accurate trend following signals. As with any oscillator, stochastic provides several varieties of crossover signals, that when used in-line with prevailing trends, are uncannily accurate. I wrote the article for binary options traders, but it is equally effective in spot forex, futures, commidites and equities trading.

Simple Stochastic Trend Following Strategy

Two tips for using the indicator is 1) use a higher time frame to determine trend, then a lower time frame for signals 2) Only use trend following signals for entries, signals counter to the trend are signals that signals are on the way, not signals to trade, for you guys trading spot positions the non-trend following signals can be used as exit targets…and they work pretty well.

Thankyou for the link,i enjoyed the read.
Can you give me your full stoch 10,3,10 settings.
It would be good if you could post some recent trades of entries and exits.
I trade on the daily charts.

which settings do you want? I use the indicator straight from my broker, no changes, I’ve got a before picture that I will post once the after picture develops…give a good show of how stochastic tracks the spx down to support along a long term trend line.

Yes i use mt4 the stochastic settings are as follows K period, D period,Slowing,Price field=low/high close/close,MA method=simple,exponential,smoothed,linear weighted.
Look forward to seeing the picture.

Can you show me where on this D1 chart you would have gotten a buy signal (AFTER) the initial breakout and stoch rotation, via your strategy?

I used 10,3,10 STOCH.

are you talking about the Novemember break out? cuz I dont’ see any good trend following entries post Novmember…at that time the rally is extending while forming divergence in the stochastic which foreshadows a top/consolidation etc…there is a very weak signal in early December but one I would likely not take due to the growing divergence in the stochastic(you can see a small bounce on the moving average)…looking back stochastic is consistent with the bottom in mid July, then creates trend following crossovers in mid August and early September, then again in Mid October…and it looks like one could be forming in the present going into the end of the year but it is not confirmed yet.

This chart shows a weak/early trend following signal that occurred today in the Dow Jones Transportation Average. A second, stronger signal can but does not always follow.

Here’s another example, in the GLD gold tracking ETF. the ETF is setting up for a bottom, based on golds movement and FOMC speculation, and has fires off an early signal, followed by a stronger signal to confirm support and set the ETF up for a move higher…

this is a follow up shot of the Dow Jones Transports, showing a 5% movement as a result of the weak trend following signal.

Its been a while since I was here but I saw a trade set up today that I think is a good example for this thread. I started out on the daily charts and saw that the usd/jpy is trading at resistance. At the same time stochastic is making a bearish crossover within the upper signal zone. The pair may break out, eventually, but at this time is looking bearish, at least in the near term, because there are no new major catalysts expected until next week when the FOMC meets.

When I moved down to the 30 minutes charts I saw again that the pair is trading at resistance, and that both MACD and stochastic are in divergence from prices. I entered a short position at this time with an exit target below 121.50 and perhaps as low the moving average.

I think what you have here is a stochastic turning point indicator or something like that. USD/JPY made a new 52 week high in the last session and is trading closer to that high than to yesterday’s low. The pair has not seen a fresh 4 week low since October nor a fresh 10 week low since last May. It is currently above all important daily and weekly moving averages, certainly the 200 day. It is difficult to say that a downward trend can be “followed” here. Anticipated, yes. But followed, not really. The historical data one can follow on this pair shows an upward trend.

Perhaps addressing this semantic issue could solve some confusion for people as mentally unfit as me.


Sorry for the confusion, yes this latest signal is a reversal/resistance signal, … My strategy starts with the trend followingsignals, and then also targets peaks during the trend, potential reversals such as this one, and also support/resistance bounces… What I find interesting is that after trading up and testing resistance several times yesterday the pair is now retreating from that resistance in a more significant way. I traded the signal twice yesterday and made some moolah both times.

here is the follow up chart for the previous set up. The indicators had been diverging while the pair was trading at or near resistance, this indicated a put play. The pair did indeed retreat from the top of the indicated range providing a profitable trade. Now the indicators and the asset are setting up for another test of resistance. The stochastic is showing a strong-ish signal and one that is very tradable over the next few days… with the FOMC minutes on Wednesday a target for exit.

This is an example of a strong trend following signal. There is a high probability the all time will be retested, with a very strong possibility of breaking to new highs.