The Stochastic Indicator: When it Works, When it Doesn’t & Why

We've just published a new T2W article called "The Stochastic Indicator: When it Works, When it Doesn’t & Why" by Steve Palmquist.

Quick Summary: Steve Palmquist explains in detail the trading conditions when Stochastics will and won't work including examples of each

PS. Don't forget to rate the article after you've read it and share your comments on this thread.

"The basic Stochastic buy performs dramatically better during bullish market periods"

Well what a surprise. Buy trades taken completely at random exhibit exactly the same thing. An appallingly bad article.

ha ha ha ha. brightened up my day.

With any type of technical analysis, you have to ask the basic question, does this indicator provide an advantage greater than you could expect by random chance.

That advantage could be an improvement in win rate, or an improvement in MFE/MAE etc, and in many cases it might not even result in an improvement in profitability. Using profit as a metric to evaluate the effectiveness of an indicator isnt very smart.

A better approach i to ask the question, how effective is the stochastic at identifying potential turning points, and maybe measure the MAE of trades taken with that particular trigger v random trades held for 5 days. If the entry trigger has merit, the MAE should reduce

Alternatively, you could ask the question can stochatics be used to identify a trend direction, you could use for example the slope of the main or signal line, or %k, or value of stochastic >50 long <50 short or whatever floats yer boat

Although I'm quite critical of the article, I do recommend the approach that he applied regarding exits. If people only grasp the bit I highlighted in bold, they'll have learned something of value.

this isnt the worst article on t2w by a long shot, but maybe t2w should have some form of peer review process prior to publication. I know most people submitting articles are muppet vendors and dont have a clue, but on the odd occasion that something of merit is submitted, a peer review process with feedback would probably have quite a positive impact.

and before anyone asks, no I wouldnt review articles :-)

To fans of Stochastics, I always ask
"how is it that one of the most successful Stochastic traders uses it in
exactly the opposite way
to which it is taught to newbies and the masses;
ie, exactly the opposite way to which YOU, Mr OP, are propounding it's use ?"

See Jake Bernstein & Stochastic Pop.

You both can't be right, and my money's on Mr B !!!!!

Hi the hare,
I'm pleased you added this post as your first one was very critical without offering anything very constructive for readers less well informed than you. Constructive criticism is warmly welcomed - and here's why . . .

I chose this article, knowing full well that its subject matter would, likely as not, attract criticism. The reason I chose it is that, as you well know, newbie traders are drawn to using indicators like moths to a flame. Most of them don't know how they're constructed, what they are supposed to do and, more importantly, what they're not supposed to do. This article goes a long way towards addressing those issues. Even so, if one takes the view (as some people do) that most (or all) indicators are totally useless, then this article is at best a red herring and certainly won't help newbies trade the markets successfully. Some might even argue that it may actually contribute to their losses. (rathcoole_exile hints at this in his post.) However, the discussion thread is as important as the article itself and provides the perfect platform for members like you to highlight the pitfalls (as you see them) of the article in question. A newbie who takes the time to read both the article and the discussion thread and then evaluates the pros and cons of each argument, will be much better informed (than they were before reading the article) and better placed to decide whether stochastics are worth incorporating into the trading arsenal - or not. For that reason, even if you think the article is 'appallingly bad' - there's still merit in publishing it and much can be learnt from it and the discussion thread.

Lastly, if the peer review process that you advocate had been in place, then there is a good chance the article would have been rejected and then the forum wouldn't have the benefit of your great insights and wisdom!

Tim.

Has any one got the code for the XYZ indicator?

I liked this article. It was pretty informative. However I don't know anyone who would blindly use one indicator and trade off of that alone. Where's the volume? Where's the price action? Where are the trend lines? Especially with no form of risk management, or money management. I'm a new trader and I think the article itself is highly critical of new traders. I did learn something from this article and it will be beneficial to me in the future. But it should be noted that if one does use the stochastic indicator, even without all of the knowledge of back testing and the resources that aren't available to most newbies. One could still be profitable in the markets. By using a wide range of analysis and not blindly using one indicator and holding on to a stock even if the market is telling you otherwise. This article also doesn't take into consideration shorting stocks based on stochastics. If what the author says about going long in bull markets is true, then it should also apply to going short with stochastics in bear markets. This brings me to the old adage cut your loses early and let your winners run. Or something like that. Why would I hold on to a losing trade for five days? I know this was just a test. But the results of the test are skewed because it doesn't take into consideration a number of different factors which has an effect on profitability. The ROI would have been much higher in this article had there been some form of risk management implemeted. Albeit I still get what the author is saying about market conditions. I do believe it is important to know which one you're in and to trade accordingly.
Thank you for the article.
-Milton