Stochastics advice please

I am using 4 charts for my technical analysis. These are EMA, MACD, RSI and Stochastics. It’s proving to be a nice setup but I do find that the Stochastics go into the overbought (70) and oversold (30) areas very quickly.
I am using Oanda charts on a slow stochastic with (10,3) setting.
Could anyone advise me on this, ie. if I should be using different settings etc.


I like using the parameters of 5,5,3. Where %K=5, %D=5, slow %D=3. You can adjust the parameters to your liking, however, just remember that the SloSto is very quick in nature and it will give many “false signals”. Its very “whip-saw-e”, but that is what makes it attractive as an indicator, it can provide you with a “heads-up” prior to other indicators.

You also need to be aware of the fact that Stochastics - like most of the oscillator type indicators - are really only optimally effective when the market is primarily range-bound. During trends they will tend to get overbought/oversold very quickly and persist at that level.

I think you should also consider the fact that all of the indicators you listed tend to have alot of lag. So, by the time any of those give you a signal it is possible you have already given up some of the move.

I find the effectiveness of any indicator improves when it is used more creatively. For instance, if you decide to go long every time your stochastic comes back out of OS territory, you might improve on that type of signal when it agrees with a few other factors. If it agrees with the overall trend and happens to occur at a significant point of support, let’s say, then i think you improve your chances dramatically of avoiding many whipsaws associated with using the oscillators as a stand alone tool. Changing your settings will not help you nearly as much as other confirming factors.

Just food for thought

I think anyone who currently uses indicators should definitely read Barbara Rockefeller’s article in the February 2007 edition of Currency Trader, entitled ‘Indicator failure and scientific analysis’.

If nothing else it will get you to think and seriously question the validity of any technical trading system you are currently using. If you can answer those questions to your own satisfaction then you’ll most likely have improved your trading system as well as your confidence and belief in it.

I’m definitely firm in the camp of non-indicator users. The only ones I look at these days are ones which measure volatility, and even those I use strictly to get an idea of where current volatility levels stand historically speaking. I’ll refer you to my recent blog post on Average True Range as an example of what I’m talking about.

Indicators are just a way to provide a filter or framework by which we look at the market. The problem is, they are historically based and at least once removed from the actual action. That automatically means they are not consistently reliable.