By the time trend is established stochastics is wrong.

Hi all,

I'm attempting to demo trade Forex by using trend lines and entering trades when the price bounces off the lines.

I'm looking at 5 minute and 15 minute charts with 2 ema lines and slow stochastics.

One general rule I was trying to stick to though is to only trade in the direction of the larger trend seen on a 30 minute chart. Also I'm trying to only trade when the slow stochastics is showing roughly the same thing on the 3 time frames.

THe image below shows a 5 minute chart of EUR/USD and I thought looked like it might be a good short trade because the general trend on the 5 min chart is down, the price seems to have bounced off the upper resistance line, also stochastics is in oversold levels and the 30 minute chart is showing a longer downward trend.



As seen below in the 15 minute and 30 minute charts the problem is that because the price has been going down for a while (and is therefore an established trend) the slow stochastics on these charts are close to oversold and are going up not down. SO they are contradicting the 5 minute chart.

Should the 3 stochastics on the different time frames always be headed in the same direction when doing these kinds of trades?

Thanks.

Stochastics measures price oscillation.

As a general point, please make sure you understand how your indicators work.

bfd said:

Should the 3 stochastics on the different time frames always be headed in the same direction when doing these kinds of trades?

Click to expand...

Might be worth checking out information on slingshot type set ups

Slingshot Trade Setup by Buffy and Jimmer

The setup basically use the stoch on the slower timeframe to verify direction, and the stoch's on the faster timeframe to identify pullbacks into the trend.

Another way of looking at it might be that the stochastic is showing you the point in the cycle where the price happens to be at any given time. If the overall (big) trend is down, then you should be looking for shorts, so then, using stochastic, you want a point in the cycle where it is just starting to tip down (just past the "90 degrees" of the (pseudo) sine-wave).

You could try to confirm the direction by using, e.g. MACD.

If the big trend was up, you'd be looking for longs, and you'd want to go for the bottom of the cycle.


Regards,
M.

As it happens, I have been looking at stochastics again, this weekend. Bnaimy uses them in his very interesting trading thread. I thought that I might be missing something but I don't think that I am, really. It has to be hindsight, call it a confirmation or whatever.

Bringing in MACD, as well, only complicates the issue.

Anyway, if it helps to keep profits coming and losses small, who am I to argue?. But life is much simpler for me since I discarded all that, years ago.

Split

Yes, a stochastic is just a smoothed measure of how close the close of this bar is to the X day range.

So a 6,3,3, stoch uses a 6 day range and smooths it twice with 3 period mas.

Better to learn what price is doing when the stoch give a true signal, and what its doing when the stoch gives a false signal. Then, the holy grail, discard the stoch for good.