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Lower Price Trend, Increasing Stochastic Trend

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Sellsword

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A TA system that I'm refining. This is my first post on ASF!

Rules;
1. Stock must be in a lower price trend
2. Price trend must be matched by a bounce in the Stochastic Oscillator
3. Price must breakout from down trend or consolidation, this is when entry occurs
4. A stop is placed 1 to 3% below the lowest low of the trend reversal/consolidation
5. As the profit rises, profit stop losses are added

An example as applied to the XSO Jan 2013 - Jan 2014

Days in market: 105
Percentage Return: 26.7%

 
I am trying to understand what this looks like.

Firstly, is it correct that you are buying into markets that have been falling and then waiting for the stock to start to rise after the downtrend or alternatively breakout of a trading range?

What kind of downtrend are you looking at? A primary or intermediate trend?

Is it correct to say then that if the stock is in a downtrend you are buying when it starts a secondary reaction? Essentially, you're strategy is going long in secondary reactions in primary or intermediate downtrends. I think this is how I understand it. Then you raise your stop losses as the stock rises, so when the secondary reaction starts to fall, you get stopped out with a profit. Is this correct?
 
Looks like simple divergence.
A and B type.

Has merit but fails far too often
Can't code it either.
Anything with a peak or trough identification needs
The zig zag indicator which cannot be used
For systems testing as the last leg is dynamic.
 

To answer your questions in order by paragraph;

The buy signal is the breakout of a range or a rise from a double bottom that corresponds to a divergence with the stochastic oscillator.

I'm not familiar with what length of time constitutes a primary or intermediate trend, though this system can be applied to any trend (for instance, on a five minute chart or a daily chart).

The rise in stop loss is to increase the rate of capital gain from the trade, yes.

The problem I am having with the system is being stopped out too early. So I'm sitting on numerous wins though they're in the range of 0.5% to 5%. I am studying TA to look at ways of preventing premature profit stops.
 

Tech/a I agree, it does fail often and it is time consuming to find the right chart.

I am looking at the ASX300 stocks only, I'd like to apply it to the ASX as a whole but I would have to learn to program!
 
Has anyone been able to design a profitable system using the stochastic oscillator that would not be profitable if the oscillator were removed from the system?
 
re: premature exits
Are you trying to trade the price momentum (swing) or the price trend (higher lows, higher highs)?
Each style will require its own exit strategy to capture the desired move. The trailing exit strategy for a swing trade would be much tighter than the exit for a trend trade.

Trend trading is much more difficult emotionally as we need to let price fall back (reducing open profits) and make a HL. Occasionally it doesn't make a HL indicating that the trend is over and you've lost a fair bit of your open profits.

If you are concerned about exiting too early then you need a re-entry rule.
 

I agree Peter2. I think what I'm looking for is a way of returning the profit of the trend without assuming the risk of the trend, thus being stopped out so frequently.
 
You may agree but I'm not sure you understand my point about trading styles and the requirements for different exit strategies. The BEN chart shows one buy signal with a momentum exit (swing trade) and the trend trade is still going.



Swing trades (price momentum trades) stay with the short term trend but exit asap once price starts down (blue entry to red exit).

Trend traders must allow price to pullback to make a HL and not move their TS closer until a new high is created. This seems to be very difficult for most people (including myself). Short term indicators like stochastics are useless for trend trading (unless you are using monthly charts).

If you are concerned about letting open profits disappear then you should consider mastering short term swing trading.
 
Just a little thing worth mentioning about the stochastic...I've actually seen it used and tested on it own by entering when its overbought or oversold WITH the trend...
 
CanOz said:
Just a little thing worth mentioning about the stochastic...I've actually seen it used and tested on it own by entering when its overbought or oversold WITH the trend...
Click to expand...

AND?
 
tech/a said:
AND?
Click to expand...

I guess i should have added it was tested with some success on its own...i'll try and find the link to the test results. The point the author was trying to make was that the oscillator can stay overbought oversold for a significant amount of time/price.

This is the link to the results. Unfortunately i cannot tell anymore which chapter that results were from because my iTunes has my eBook (which was free at the time) and won't allow me access anymore.

They've also done some interesting research and testing on the session times as well, but that's another topic.


Update: I downloaded my book again from iBooks and found that these results are basically from reversing the signals of a counter-trend Stochastic strategy on the EURO. So now its a trend following strategy. His point however was to use this as a filter to improve his results on a system based on the bullish / bearish tendencies of the sessions, however he was quick to point out that the oscillator works better as a trend following indicator.
 

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CanOz said:
Just a little thing worth mentioning about the stochastic...I've actually seen it used and tested on it own by entering when its overbought or oversold WITH the trend...
Click to expand...

CanOz, seen it used successfully?

I've backtested several methods and it's not a winning strategy. Divergence has to be followed by a breakout or other candlestick pattern.
 
Sellsword said:
CanOz, seen it used successfully?

I've backtested several methods and it's not a winning strategy. Divergence has to be followed by a breakout or other candlestick pattern.
Click to expand...

As i posted above, it works well as a filter. Definitely doesn't work well as a counter trend signal.
 
CanOz said:
it works well as a filter.
Click to expand...

I can confirm that. I have been using it in my Analysis scan for ten years. as a filter only.

Definitely doesn't work well as a counter trend signal.
Click to expand...

And I can confirm that as well: I tried to invert the rules to detect tops and signals to go short - but failed.
(However, the volatility envelope works well enough for that purpose.)
 
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