The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at
I am always open to questions, comments, or suggestions on how to improve this blog.

Friday, October 3, 2008

stochastics and cycles

I've moved this post because I want to keep it together with my 3/10MACD post, as these are posts that deal with my trading set-ups.
I've been reading about trading with cycles lately. I've been wanting to read this book, but haven't ordered it, as I've got quite a queue of books stacked up at the moment. If anyone has it, I'd like to hear your reviews. I've also been reading through the Tradestation forums pertaining to cycles, which are a wealth of information. What I've been focusing on lately is the use of multiple double smoothed stochastics, and using them to highlight the alignment of cycles from different time frames to increase the chance of a high probability trade. There are also Long-range cycles.
To give a brief synopsis:
The stochastic oscillator measures the most recent price in relation to the total price range for a selected time period, on a percentage basis of 0 to 100%. A fast stochastic uses a 3-period moving average of the %k-line (represented as a second line referred to as %D). A slow stochastic, or "smoothed" stochastic, can then be smoothed further (double smoothed) by taking yet another 3-period moving average of the previous slow %D-line average.
Oscillator lengths can be tied to underlying market cycles. While precise time cycles can be difficult to pinpoint, a simplified approach would be to use 5, 10, 20, 40 -lengths/cycles to represent the number of trading days in One Week, 1/2-month, 1-month, and 2-month -period respectively. Most default indicators, like the stochastic, use a 14-period length. This length is based on more of a calendar cycle, so a 14-length represents approximately 2-weeks, or a half-cycle (half of a month).
Different markets "cycle" differently; commodities, from softs to metals, have different market cycles, just as security indexes and sectors do, so it's up to you to find a good fit. But to keep it simple and proportionate start with the 10, 20, 40 for the Daily multiples.
While trading divergences of an oscillator can work from time to time, they can't be relied upon solely. An important consideration must be given to the underlying trend while trading Overbought/Oversold (OB/OS) crossover triggers as well. Most buy signals (crossing above 20) can work best in up-trends, while most sell signals (crossing below 80) can be more profitable in down-trends. This is where other indicators and moving averages, etc., come in handy as filters.
So, with that in mind, one should consider trend WHILE ALSO giving less attention to the stochastic oscillator in the early stages of a move, but paying close attention to its signal as the move matures (or nears an end).
Anyway, lots of words. It's time for the charts. The basic strategy here is to use three different lengths on one chart, wait for an alignment, or agreement in direction, of the 3 "cycles" and act off of that alignment. I'll keep the lengths the same (10, 20, 40) and use AAPL and the S & P 500 index.
Can be used daily:
Weekly:Or, you can just use your Slow Stochastics:Or, try Intra-day, using a 5-min chart with lengths of 12, 36, 72 to represent 1-hour, 3-hours, and 6-hours:

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