Two Rules For Trading With Oscillators

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What Stochastic Oscillator Is? Description, Trading.

Description of the Stochastic Oscillator

The Stochastic Oscillator appeared and became popular thanks to a famous trader George Lane. He noticed that prices, moving from one level to another, sometimes create overbought and oversold areas; Lane automatized the process of finding these areas with the help of an indicator. The Stochastic is an oscillator demonstrating the position of the current price in % in relation to the previous price range.

The Stochastic Oscillator chart is drawn in a separate window under the price chart and consists of two lines: %K, the quick one, and %D, the slow one. The values vary from 0% to 100%; at the levels of 20% and 80% signal lines, defining the oversold (0-20%) and overbought (80-100%) areas, are drawn.

The Stochastic shows the capability of bulls and bears to set the closing price at the edge of the recent interval. If bulls manage to raise the prices during the day but fail to secure the closing price near the maximum, the Stochastic starts falling, demonstrating the weakening of the bulls. If the closing price after the new minimums rises to the upper border of the range, it means that the bears have managed to pull the prices down but failed to secure them there. The growth of the Stochastic shows that the bears are not as strong as they seem.

Calculation formula, characteristics and settings

The indicator is drawn in a separate window and consists of two lines:

  • is the quick main line (solid line)
  • %D is the slow supplementary line; it is a moving average of %K with a small averaging period (dotted line)

The formula for calculation of the main line:

%К = (С – Ln) / (Hn – Ln) * 100

  • С is the closing price of the current period
  • Ln is the lowest price during the last n periods
  • Hn is the highest price for the last n periods
  • %D is the averaging of the %K line with the period specified in the settings.

When setting up the Stochastic, the following parameters are to be specified:

  • %К period is the calculation period for the main line of the indicator. The default setting is 5.
  • %D period is the averaging period for drawing the secondary line. The default setting is 3.
  • Slow-down — this parameter defines the inner smoothing of the %K line and lets the indicator react on steep price changes. The default setting is 3.
  • Prices — the type of price used. Low/High — maximums and minimums are used. Close/Close — closing prices are taken into account. Default settings are Low/High.
  • MA Method defines the type of the Moving Average for %D calculation. The default setting is Simple.

Also, by default, there are levels of overselling and overbuying, recommended by the author, set at 20 and 80%, respectively.

The Stochastic is frequently used with the default settings. At the same time, the user can always customize them, assess the work of the indicator historically with different settings and pick up those that suit their trading best.

Connection of the Stochastic to other indicators

The name “Stochastic Oscillator” suggests that the indicator should belong to the oscillator group. As a rule, oscillators fluctuate in a certain range, showing deviations of the price from the so-called normal values, i.e. signaling about its overbought or oversold state. The indicators, giving results similar to those of the Stochastic, are the RSI (Relative Strength Index) or Williams Percent Range.

The advantages of oscillators are good trading signals in a flat when the trend is not obvious. The disadvantages would be signals against the current trend when the trend on the market is strong. That is why it is recommended to supplement the Stochastic with some trend indicator in order to cut off losing trades against the trend. Such an indicator might be the MA (Moving Average). In this case, the MA (or two MAs) may act as a filter: only those signals of the Stochastic will be used for trades that coincide in the direction with the MA(s). If the MA is growing, only signals for buying are used; if it is declining, only signals to sell are taken into account.

Trading with Stochastic Oscillator

Let us have a look at the three main trading signals of the Stochastic:

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Crossing of the %K and %D. If the main quick %K line crosses the slow %D line upwards, this signals to buy, if vice versa, top-down — to sell.

If the crossing occurs in the overbought or oversold areas, this is considered a strong trading signal; if it happens outside these areas, this is considered a weak signal.

Exit from the overbought and oversold areas.

Exiting the overbought and oversold areas by %K and %D is considered a reliable trading signal. If the %K and %D lines exit the oversold area and rise higher than 20%, buying is recommended. If the lines exit the overbought area and fall below 80%, selling is recommended.

Divergence of the Stochastic and the price chart.

A divergence (from the Latin divergere — find a difference) occurs in case the Stochastic differs from the price chart.

Bull divergence (a signal to buy) emerges when the price chart features a new minimum, while the Stochastic demonstrates a shallower minimum than the previous one. This means that the bears are weakening, moving just by inertia. After forming a second minimum and the beginning of the Stochastics lines going up, buying is recommended. The signal is considered stronger if the first minimum of the Stochastic was below the level of 20% and the second one above it.

Bear divergence (a signal to sell) appears when the price chart shows a new maximum, while the Stochastic features a maximum lower than the previous one. This means that the bulls are weakening, moving just by inertia. After forming another maximum and the beginning of the Stochastic descending, selling is recommended. The signal is considered stronger if the first Stochastic maximum was above the level of 80% and the second one below it.

Summary

It is worth noting that, regardless of the old age (it was created in the 1950s), the Stochastic Oscillator remains rather popular among traders. However, it should be realized that it is by no means universal. In my opinion, it can be used in addition to technical analysis or a trend indicator. Then the Stochastic will help find good entry or exit points, probably taking a due place in your trading system.

A Dual Stochastic Forex Strategy Offers Better Results

A Dual Stochastic Forex Strategy Offers Better Results

Stochastic oscillators can be a valuable tool for mechanical forex traders. Yet, traders often use stochastics together with numerous unrelated indicators, and the results are generally ho-hum.

Like some other traders, I’ve found that using a single stochastic oscillator usually doesn’t produce consistent winners. One stochastic by itself doesn’t seem to yield eye-popping gains.

The good news is that a dual stochastic forex trading system can produce excellent results. I’ve discovered that a winning strategy can be built simply based on dual stochastic indicators, with very little else to clutter the picture.

I’ve enjoyed excellent results by using two stochastic oscillators together – one slow, and the other fast – in order to find trading opportunities.

When used with the appropriate parameters, a system programmed to monitor dual stochastic indicators can signal when the price of a forex pair is trending yet overextended during a period of short-term retracement.

This dual stochastic strategy focuses on trading when the two indicators are showing extreme opposite values. When both the fast and slow stochastics are at or near the designated limit values, it signals a trading opportunity.

I use my mechanical trading system to watch for such conditions, and enter a trade when the price is about to revert back to the continuation of that trend. For me, it’s a good, simple forex trading system that works very well on its own, without adding other, more-complex indicators.

I’ve used this strategy for trading over a variety of time frames from fifteen-minute to daily. I’ve had particularly good results when using this strategy for trading EUR/USD on hourly time frames, and it works especially well for “short” trades in this currency pair.

The background of stochastic oscillators

The first basic stochastic oscillator was developed in the late 1950s by financial analyst Dr. George C. Lane. The word stochastic itself is derived from a Greek word meaning ‘aim’ and in general finance the word usually refers to the seemingly random pattern of values around a given target value.

Stochastics are based on the idea that during an uptrend prices will stay at or above the closing price of the previous time period. Likewise, during a downtrend prices will stay at or below the closing price of the previous time period.

This easy-to-calculate oscillator was one of the very first indicators used by technicians searching for insight into price moves. It’s a momentum indicator, and it reflects support and resistance levels.

When he first developed this concept, Dr. Lane advocated the use of divergent and convergent trendlines drawn according to stochastics. And, during the earliest use by Dr. Lane and others, stochastic oscillators were usually used with other tools such as Elliot Waves and Fibonacci retracements for best timing.

With regard to trading forex pairs and other assets, the term “stochastics” refers to the location of the current price relative to its recent price range over some given period of time.

Part of the reasoning behind stochastic indicators is that a forex price has a tendency to close near the extreme of its recent price range before a turning point. A stochastic strategy works to predict the price inflection points by comparing a forex pair’s closing price to its recent price range.

The values are plotted on a chart as one or more bands which oscillate around an axis or between a set of limit values. Mechanical trading systems and expert advisors make it easy to set up forex trading programs that incorporate stochastic indicators.

How to calculate fast, slow and full stochastic oscillators for forex trading

Before moving forward to discuss the dual stochastic forex trading strategy, I’ll first lay a foundation by defining and describing the underlying stochastic oscillator concepts.

The basic single stochastic compares a forex pair’s closing price to its overall price range during a given period of time by using two lines or bands.

The line referred to as %K reflects the current market price for a given currency pair. The %D line serves to “smooth out” the %K line by showing the currency pair’s price as a moving average.

There are three general types of stochastic oscillator indicators used in forex trading: Fast, slow and full. The “fast” one is based on Dr. Lane’s original equations for %K and %D. When viewed in the fast version, %K looks fairly choppy. %D is the three-day moving average of %K.

During the earliest use of stochastics for trading, Dr. Lane relied on %D to produce “buy” or “sell” signals according to bearish and bullish divergences. Unlike the dual stochastics strategy, when traders use only a single stochastic indicator, they use %D by itself, and it’s called the “signal line.”

Since %D in the “fast” oscillator is used to generate signals, the “slow” oscillator was introduced to take advantage of this by itself. The slow stochastic oscillator used a three-day SMA to smooth %K, which is exactly equivalent to the role of %D in the fast oscillator.

So, in single stochastic strategies, %K in the slow oscillator equals the %D of the fast oscillator.

The basic stochastic oscillator

%K is 100 x [Closing Price minus Lowest Price of N time periods] / [Highest Price of N time periods minus Lowest Price of N periods]

%D is 100 x [Highest Price of (N minus a lesser number) time periods] / Lowest Price of (N minus a lesser number) time periods]

The first equation calculates the range between the high and low of the forex pair’s price over a given time period. The forex pair’s price is expressed as a percent of that range: 100% represents the top limit of the range and 0% represents the bottom of the range, during the chosen time period.

Fast Stochastic

Fast %K equals the basic %K calculation
Fast %D equals a three-period simple moving average of Fast %K

Slow Stochastic

Slow %K equals Fast %K smoothed by applying a three-period simple moving average
Slow %D equals a three-period simple moving average of Slow %K

Full Stochastic

The full stochastic oscillator is calculated this way:

Full %K equals Fast %K smoothed by an N-period simple moving average
Full %D equals an N-period simple moving average of Full %K

A stochastic oscillator’s sensitivity to marketplace volatility can be reduced by making adjustments to the time periods, as well as by using different moving averages for the %D value.

The most commonly-used values of N used for single, basic stochastics are time-periods of 5, 9, or 14 units. Many traders set N at 14 time-periods in order to represent a sufficient data sample for meaningful calculations. You can experiment with a different number of periods, and this may affect the results of the strategy.

%K by itself is referred to as the “fast stochastic” value. For single stochastic indicators, %D is generally set to equal a 3-period moving average for %K.

The single %D stochastic is calculated using the last 3 values of %K in order to arrive at a 3-period moving average for the %K stochastic. This creates a “smoothed” value for %K.

Since %D represents the moving average of %K, it’s called the “slow stochastic” because it reacts somewhat more slowly to forex-pair price changes than the %K value does.

When using %D by itself, there is only a single valid signal – The divergence between the price of the forex pair and %D.

Of course, for my dual stochastic strategy as outline below in this article, I use two different sets of time periods.

As indicated above, the classic stochastic calculations are based on a simple moving average (SMA). However, for the dual stochastic strategy described below, I also use an additional exponential moving average (EMA) as a separate confirmation indicator.

The dual-stochastics forex trading strategy

In contrast to the basic single-stochastic indicators described above, a dual stochastics strategy provides a greater number of winning trades.

My dual stochastic forex trading strategy is based on combining together a fast and slow stochastic and waiting for opportunities when the two different indicators are at extreme opposites. I define the extremes as being at least the 20% and 80% levels, if not closer to 0 and 100%.

The dual strategy is simple – The only other indicator I use along with the set of stochastics is a 20-period exponential moving average (20 EMA), although even that isn’t essential. Or, as an alternative, you could confirm signals by using the middle band of the Bollinger bands.

In MetaTrader, the parameters to be set for the two (dual) sets of stochastics are:

Fast stochastic

  • %K period is 5
  • %D period is 2
  • Slowing is 2
  • Fixed minimum is 0
  • Fixed maximum is 100

Slow stochastic

  • %K period is 21
  • %D period is 4
  • Slowing is 10
  • Fixed minimum is 0
  • Fixed maximum is 100

I combine both of the stochastic oscillators in the same window in the MetaTrader chart. It’s easy to do – Just place the first stochastic on the chart, then drag the other one from the window and drop it down on top of the first indicator. Then enter your settings in the dialog box.

Dual-stochastics trading rules

The trading rules are easy. The mechanical trading system is programmed to wait for strongly-trending price, and watch for the stochastics to be at extreme opposites, near the limit values. For confirmation, the system looks for a candlestick pattern signaling a reversal after a brief retracement to the 20-period EMA.

The below EUR/USD chart shows some examples of trading opportunities. The circles show three prospective entry points for “short” trades in an overall downtrend. Examples 1 and 2 are clear signals. Example 3 is marginal, since the slow stochastic is just beginning to move up away from the oversold area.

In Example 1, note particularly that the slow stochastic (the yellow band) is quite oversold, and at the same time the fast stochastic (blue-colored band) has just finished moving beyond the extreme overbought limit.

The below EUR/USD chart shows a typical “short” trade entry point during a well-confirmed downtrend. In particular, note the flat, oversold slow stochastic band (yellow), together with the (blue) fast stochastic band’s sharp downward hook below the overbought limit.

Note also that the 20 EMA was touched. The separate EMA indicator provides confirmation of the signal shown by the stochastic oscillators. As well, it’s also worth noting that even though the bearish candlestick isn’t a “classic” engulfing type, still it was confirmed by the later candlesticks.

In the EUR/USD chart below, Example 1 shows a typical “short” trade. The slow stochastic (yellow) is flat and touching the oversold limit, while the fast stochastic (blue) has touched the overbought limit.

Example 2 shows a signal that looks to candlestick-lovers like a classic bearish “evening star” pattern at the 20 EMA, but still required a tight stop-loss in order to exit at breakeven.

Entry and exit

This last example above is a good reminder that the dual stochastics forex trading strategy is best used with a mechanical trading system programmed with firm trailing-stop and stop-loss rules to ensure that you ride the winners for as long as possible, while minimizing the losses.

As illustrated in the charts above, the strategy works best for me with the “shorts.” I program my mechanical trading system to enter a “sell” order for 2% of my account equity when the two stochastic bands touch the respective overbought and oversold limits, and the signal is confirmed by the price touching at or near the 20 EMA.

The stop-loss order is placed at exactly 20 pips above my entry point. The system moves my trailing-stop order along behind the current price level during successful trades, usually at a distance of 10 pips.

The dual-stochastic forex trading strategy is simple

The main advantage of this strategy is its simplicity. Instead of relying on the “iffy” nature of a single stochastic indicator, or the complexity of multiple layers of indicators, a set of two stochastic oscillators works very well for me. The strategy is easy to understand, and it’s easy to program for mechanical trading systems.

Have you been using stochastic oscillators in your own trading?

Trading System using Awesome Oscillator

I have been been using a simple trading system using the Awesome Oscillator and Accelerator/Decelerator Oscillator for four weeks now and was hoping I could get some help and ideas on making it better and setting SL and TP’s.

I use the Awesome Oscillator (AO) and the Accelerator/Decelerator Oscillator (AC) indicators on a 4hr, MetaTrader chart with GBP/USD.

I enter a trade on the close of a 4 hr candle when I have change of color on the AO and two consectutive and same colors on the AC. I exit trade on the close of a 4 hr candle when I have the same opposite colors on both AO and AC. (ie if the AO changes from red to green with the AC being green and having a previous AC 4 hr green, I buy. I close when the AO and AC are both red at the same time on a 4 hr close).

I enter with two equal lots, both set at SL of -70 pips. At +50 pips I move one lot to break even. At +100 pips I move the first lot to 50 pip trailing and move the second lot to BE. at +150 pips I move the second lot to 100 pip trailing.

Since I use Oanda , I have to manually move the SL for trailing stops, which mean I miss the exact point sometimes.

System total for week of Jan 7-12 was +564 pips, Jan 14-19 was -191 pips, Jan 21-26 was +70 pips. This was the total pips for two lots. For this week I entered two lots Monday morning at 1.9574. The first lot was stopped out at +70 pips and the second lot is currently +54 pips with the SL at BE.

The first three weeks I did not get anywhere close to the system totals as I kept second guessing the system.

Any insight on the system, stop losses, take profits, ect. would be appreciated.

  • Post # 2
  • Quote
  • Jan 31, 2007 8:11am Jan 31, 2007 8:11am

The AO changed back to red on the close of the candle at 2 am EST. The AC had been red since the close of the Tuesday 10 am EST candle. This closed the second lot for +47 pips.

The system also gave signal to sell two lots at 1.9622 at 2 am EST. Around 4:30 am EST it bottomed out at 9511 then rose to 9556 around 5:45 am. At +100 pips a 50 pip trailing stop was initiated on the first lot which would have have stopped out the first lot at +61 pips. The second lot is at BE and currently is at +95 pips.

I woke at 2 am to check to the close of the candle and closed the second lot on earlier trade, however I second guessed the system again and did not enter the sell trade .

  • Post # 3
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  • Jan 31, 2007 10:23am Jan 31, 2007 10:23am
  • Post # 4
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  • Jan 31, 2007 1:40pm Jan 31, 2007 1:40pm

Deathpan, I’ll try to add a screen attachment.

I started manually back testing from last January and got up to June, but I’ve since changed some the rules and have not had a chance to go back and apply them or finish out the year. I started out looking for raw gains and losses, then added a SL of -70. The TP I based on change of color at the close. These numbers are one lot only, whereas I am now trading with two lots.

Jan 06 +594
Feb 06 +114
Mar 06 +446
Apr 06 +460
May 06 +185
June 06 +607

Half yr total of 2406

  • Post # 5
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  • Jan 31, 2007 1:52pm Jan 31, 2007 1:52pm

Deathpan, I’ll try to add a screen attachment.

I started manually back testing from last January and got up to June, but I’ve since changed some the rules and have not had a chance to go back and apply them or finish out the year. I started out looking for raw gains and losses, then added a SL of -70. The TP I based on change of color at the close. These numbers are one lot only, whereas I am now trading with two lots.

Jan 06 +594
Feb 06 +114
Mar 06 +446
Apr 06 +460
May 06 +185
June 06 +607

Half yr total of 2406

  • Post # 6
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  • Jan 31, 2007 1:56pm Jan 31, 2007 1:56pm

The second lot was closed out at break even when the GBPUSD climbed above 9622 after 11 am EST.

So far this week in two trades the system is +178 for two lots (with a spread of 12 pips on four trades it is +166).

Trade 1
Lot 1 +70
Lot 2 +47

Trade 2
Lot 1 +61
Lot 2 +0

  • Post # 7
  • Quote
  • Jan 31, 2007 2:34pm Jan 31, 2007 2:34pm

can u post an photo example Please

  • Post # 8
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  • Jan 31, 2007 3:36pm Jan 31, 2007 3:36pm

Interesting timing on the post, as I was about to put a call out to see if anyone was using the “Profitunity” system as it is known.
First, apologies if you know all this already, but maybe it will open up the conversation,and since you asked.
There is actually a codified system for using the so-called Awesome Oscillator and Accelerator. If you haven’t already, I would suggest reading Bill Williams’ “Trading Chaos” and “New Trading Dimensions” a few times. There is more to it than just the AO & Acc- a whole system of directional signals, fractal buy/ sell orders, moving averages (Alligator), trailing stops, and money management, all there in black and white. Your technique is called “Trading in the Zones”- just a small part of the system. One of the first methods in the system involves filtering out choppy market signals and making sure you are in a “trend”.This is one problem I see with the system- many of his examples are of the futures and commodities markets where the prices are going only in one direction for MONTHS at a time- the AO doesnt even cross to the upside at all. In my tentative forays into actually using the system I have found nothing better for sucking the pips from big trends, but if you don’t follow the system exactly it will hand you your ass on a plate just as fast, and if you try to trade it in a choppy market you can kiss your account goodbye. Also, in some ways I don’t believe this system lends itself to a 24 hour market cuz a lot can happen while you are sleeping that you would need to micro-manage. As far as stop losses go, he doesn’t get into them much because of course his system barely needs them but in general a stop below the nearest Fractal is what I recall. Okay enough of my 2 pips worth- it’s time for the wit and wisdom of Bill himself. Here’s a money quote about stops from the “Tying it all Together” section of “New Trading Dimensions”:

Step 4- Placing our first protection against loss:

“My choice generally at this point is to place a stop to get out of the market (go flat) on the first close of above(/below) the Alligator’s teeth (Red Line). If the mouth does not open immediately and the Red line stop is closer than I want, I will place a stop and reverse at the first fractal in the opposite direction that is outside the teeth.

(ok the coffee is wearing off- I will now quickly paraphrase how profit is taken. )

1. a close below /above Alligator’s teeth
2. Five consecutive bars of the same color moving stop below each bar
3. Green Line (Lips) stop
4. a “reversal” signal ( divergent candle. )

phew. There is MUCH MORE that bears discussion here but now Taters is tired.
GOOD LUCK to you sir!

  • Post # 9
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  • Jan 31, 2007 6:11pm Jan 31, 2007 6:11pm

Well gblair you put a bee in my bonnet. I made a pic of the same timeframe with many (not all!) of the signals of the Bill Williams system.
Net result? Normalized @ 1 lot ip, approximately 897 pips not including slippage,spread, etc etc etc.
Part of the genius (and scary danger) of this is the money management aspect.
BW recommends a pyramid of entries:
First entry= 1 lot. If this goes your way and your signal is right, then.
Second entry= 5 lots,
Third entry= 4 lots
Fourth entry= 3 lots
Fifth entry = 2 lots
Sixth entry = 1 lot.

So laid out at the equivalent of 1 lot/ pip you get many more $ per pip than the 184 pip move would suggest. It would stink to have 5 lots go against your first entry though :surprised:flushed: !

I don’t think BW trades “at market”. Orders are placed 1 “tick” (the equivalent in Forex is a pip but this is too small I think. ) below the signal. This way, the market has to be continuing in your direction for a signal to be taken, whereas if you just bought or sold at market price on the next candle- who knows? It might go against you and you’d be losin mad $.

PS: stop loss for first entry would be above the high of the highest candle.
Red horizontal lines show approximate entry bars. If you were more conservative these would be farther from the bottom of the candles; less signals, less draw down, less profit.

Just for the record this post is for informational purposes only. I’m not an expert using this system. I just read a book is all. I don’t necessarily advocate using these techniques, and your mileage may vary.

  • Post # 10
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  • Feb 5, 2007 12:35pm Feb 5, 2007 12:35pm

I found a page on the Alpari web site that has a roundup of so-called “Chaos Theory” trades, including Zone trades that were the point of this thread.
Puts things more simply than I probably did!
Cheers,
Taters

  • Post # 11
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  • Feb 6, 2007 9:33am Feb 6, 2007 9:33am
  • Post # 12
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  • Feb 6, 2007 11:39am Feb 6, 2007 11:39am

Tater and Dlftrader, thanks for the responses and advice.

I’ve decided to shelve my trading stradegy using the AO and AC unitl I’ve had a chance to read up on the William’s books you guys suggested.

I like the indicators and think I can someday get them to work for me.

  • Post # 13
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  • Feb 6, 2007 12:14pm Feb 6, 2007 12:14pm
  • Post # 14
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  • Jun 22, 2008 7:02am Jun 22, 2008 7:02am

Any news for t system??

  • Post # 15
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  • Jun 22, 2008 9:11am Jun 22, 2008 9:11am

I’ve been trading the system in the gold market, i use alligator, fractals, zigzag, AO, AC and Gator. average moves i get with his pyramid system, give on average 1000+ pips a day. losses usually incurred on 1st contract only. you have to sit there and monitor it. this is an active trading strategy, but the results are phenomenal when you really know what you’re doing.

To improve your chances of success i also use 2 more windows, with over 10 indicators: MA’s, rsi over ma crosses, stochs, macd, agx, bollinger, pSAR, alligator. USED Together they give accurate trade signals. when you’re in trend, give it all you’ve got. i would be happy to risk around 10% of the account on the combined margins of Pyramid contracts. on the 19th i’ve downed around 1000 combined pips on gold, with a combined of 1.5 lots. Happens quite often nowadays with gold. a 200 pip move one way is achievable around every other day. gotta be in to win it.

Little discouragement though – dont think you’ll make a killing. you have to study the system very carefully, practice until you are comfortable, then play small with micro lots until you feel safe. One day i will move to 1 lot, 5 lots, 4, 3, 2, 1 – thats a goal of mine. once i have couple of mills stashed away.

  • Post # 16
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  • Jan 7, 2009 12:48pm Jan 7, 2009 12:48pm

Firstly I have to admit that I am a relatively new forex trader but I have been working hard on a personalised system for my own use to take profits from the trends on the 5 min charts. I chose this time frame and method because it requires a relatively small stop loss and once everything is closed your day is over and you can relax.

Secondly let me set out my understanding of trading on this time frame. In my view your best chance of turning a profit from these markets is to use a system that will give you clear entry signals at the start of a POSSIBLE trend, cut your losses short if you are wrong and ride your winners if you are right.

Ok, this is all fairly basic so far. This discussion sparked my interest because I use the AO and AC as the basis for my trading too.

I would greatly appreciate any constructive advice about the following system. It is a work in progress but I have been using and developing it on an ongoing basis and so far it is profitable. I am only trading a very small account but have increased it by 50% in the last month while risking 5-10% of my account per trade. I realise this is a large amount to risk per trade but obviously as my bank builds I am keeping my trades the same size so my risk per trade is getting smaller.

Pre trade I check the higher time frames for any major support/resistance/trendlines.

21, 55 and 89 EMAs applied to the close.
Parabolic SARs 0.01/0.1 and 0.05/0.5
Awesome and Accelerator oscillators
Momentum oscillator
CCI

* I know the last 2 do very similar things but I find one better for entries and the other better for exits.

There are some points to bear in mind when searching for an entry.

If the slow SAR is trending very, very slightly and the faster SAR started trending significantly before the slower one (ie more than about 4 dots) then this is a sign of weakness in the signal (though not always).
Take into account the direction of the higher MAs, it is always better to trade in the direction of the existing trend but you should be able to preempt the start of a change in trend by the angle the MAs are diverging (this is down to practice and trial and error unfortunately and I doubt anyone will always be right with trying to spot a change of direction!).
Also, it is possible for a strong up or down candle to give you an initial signal only for the confirmation candle to go the other way even though all the other indicators are screaming at you to buy/sell. Avoid.

The main rules for the entry are as follows.

When the price closes above/below the 21 EMA, the AO and AC are the same colour and trending in the same direction (at least 2 bars agree), both parabolic SARs are above/below the price indicating the same direction, the momentum oscillator is above/below the 100 level (ie in the direction of the trend) then enter a trade with 2 lots (or portions of lots that you can sell half of). You can also use the CCI move above/below the 100/-100 level as a confirmation indicator. As I said earlier it does a very similar job to the momentum oscillator but they do vary slightly and the MO is better for entries whereas the CCI is better for exits.

In trade management/Exits.

I have revised this part of the system more than any other. At the moment this is my best exit strategy that I can come up with but maybe you can suggest better?

Place the stop loss 2 pips above/below the high/low of the candle prior to the signal candle or 20 pips from the entry price, whichever is furthest. Your first profit target is +20 pips. As soon as the trade opens trail the stop loss along the middle of the fastest SAR (colour them differently) until you reach breakeven then trail the stop loss by the slower SAR or until the CCI moves above/below the 0 level against the trend (make sure it does cross as it can bounce back easily).

This is the basic system I have been using and it works just fine but if anyone can help me improve it I would really appreciate it. Thanks for reading this far.

I have attached a gif image of a trade screen on the GBPUSD.

A is the buy candle. You couldn’t have opened the trade on the previous candle as the parabolic SARs were against the previous candle. As they changed the setup became valid for a buy signal on the candle marked, note at the open of this candle, not at the top.

B is all the other indicators agreeing. Don’t forget they will have changed due to the movement of the price for that bar but they were still in agreement before that upwards move.

C is trailing the stop after the initial 20 pip profit has been taken. This move was happening a little slowly but was going up.

The second image is after the close of the trade. A is the parabolic SARs against the trade and B is the CCI crossing the 0 level.

This was a good trade which made me 66 pips on both lots combined but rest assured there will be many times that you are stopped out but I think using the 2 different SARs will prevent you from both losing too much at the start of your trade and from exiting too early at the end of your trade.

If you can see anything obvious in the way of an improvement then please let me know.

How to Trade with Stochastic Oscillator

Using Slow Stochatics to Trade Talking Points:

  • Slow Stochastic provides clear signals in a forex strategy
  • Take only those signals from overbought or oversold levels
  • Filter forex signals so you are taking only those in the direction of the trend

Stochastic is a simple momentum oscillator developed by George C. Lane in the late 1950’s. Be ing a momentum oscillator, Stochastic can help determine when a currency pair is overbought or oversold . Since the oscillator is over 50 years old, it has stood the test of time , which is a large reason why m any traders use it to this day.

Though there are multiple variations of Stochastic, today we’ll focus solely on Slow Stochastic.

Slow stochastic is found at the bottom of your chart and is made up of two moving averages. These moving averages are bound between 0 and 10 0. The blue line is the %K line and the red line is the %D line. Since %D is a moving average of %K , the red line will also lag or trail the blue line.

Traders are constantly looking for ways to catch new trends that are developing. Therefore, momentum oscillators can provide clues when the market ’ s momentum is slowing down, which often precede s a shift in trend. As a result, a trader using stochastic can see these shifts in trend o n the ir chart.

Learn Forex: Slow Stochastic Entry Signals

(Created by Jeremy Wagner)

Momentum shifts directions when these two Stochastic lines cross . Therefore, a trader takes a signal in the direction of the cross when the blue line crosses the red line.

As you can see from the picture above, the short term trends were detected by Stochastic. However, traders are always looking for ways to improve signals so they can be strengthened. There are two ways we can filter these trades to improve the strength of signal.

1 – Look for Crossovers at Extreme Levels

Naturally, a trader won’t want to take every signal that appears. Some signals are stronger than others. The first filter we can apply to the oscillator is taking cross overs that occur at extreme levels.

Learn Forex: Filtering Stochastic Entry Signals

(Created by Jeremy Wagner)

Since the oscillator is bound between 0 and 100, overbought is considered above the 80 level. On the other hand, oversold is considered below the 20 level. Therefore, cross downs that occur above 80 would indicate a potential shifting trend lower from overbought levels.

Likewise, a cross up that occurs below 20 would indicate a potential shifting trend higher from oversold levels.

2 – Filter Trades on Higher Time Frame in Trend’s Direction

The second filter we can look to add is a trend filter. If we find a very strong uptrend, the Stochastic oscillator is likely to remain in overbought levels for an extended period of time giving many false sell signals.

We would not want to sell a strong uptrend since more pips are available in the direction of the trend. (see “ 2 Benefits of Trend Trading ”)

Therefore, if we find a strong uptrend, we need to look for a dip or correction to time a buy entry. That means waiting for an intraday chart to correct and show oversold readings.

At that point, if Stochastic crosses up from oversold lev els, then the selling pressure and momentum is likely alleviated . This provides us a signal to buy which is in alignment with the larger trend.

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