One of the oscillator indicators most commonly employed by Traders is the Stochastic. Unlike most other indicators that are encouraged to use default parameters (such as Bollinger Bands, MACD ...) Stochastic is quite flexible in setting parameters to suit the purpose of use of each Trader, but also This also makes many Traders "set" wrong parameters because they do not really understand Stochastic.

Set the most suitable parameters for Stochastic

Choosing the settings for Stochastic depends on your trading style as well as the "noise" that you are willing to accept. Understanding this will help you improve your ability to recognize reliable signals. For short-term Traders, they tend to choose low spec for all variables as it will generate early signals in accordance with these highly competitive market conditions. And conversely, long-term Traders tend to choose large parameters for variables so that they get a smoother Stochastic and only react to significant price actions.


[A larger variable will give a smooth and less noise Stochastic]

The illustration above shows the different traces that the Stochastic line left depends on the parameters established. The cycle of the Stochastic line usually changes when the fast line intersects the slow line in the overbought/oversold area. With a low parameter of 5.3,3 this crossover is quite frequent without reaching the overbought/oversold zone, that is, it reacts and gives the signal to buy/sell very quickly when price fluctuations lead to consequences. is quite high noise. With the average parameter of 21.7.7, the Stochastic line is smoother, the intersection signal is also less likely, ie the noise has been reduced. With high parameters, the Stochastic line has quite long "steps" before there is a periodic change, the noise is now reduced to a very low level, but as a result, latency increases significantly.

The area marked in blue in the illustration shows that the price bottomed and the signals between the Stochastic lines coincide. However, this does not happen very often, and it also shows that the parameter setting is not as important as the Trader's skill "filter noise".

Stochastic and pattern analysis

One thing to note is that the Stochastic does not necessarily reach the new extreme for reliable signals, especially when price patterns give traders other clues. While most would argue that overcoming the polar regions is necessary for a reliable signal, it really takes the Stochastic above the neutral level (50) to have a valuable signal as long as the price meets. resistance-support. MAs, gaps (price jumps), trendlines, or Fibonacci retracement can also be used instead of resistance-support in the case just now. This shows that reading price patterns at the same time with Stochastic analysis is essential.


[Combining Stochastic analysis with other tools]

At point 1, the price turned back when the Stochastic had not entered the oversold zone but it hit the dynamic resistance (EMA50). It is the same at point 2 when the price hits the trendline. And at point 3 again the price turned back when it hit the dynamic resistance line EMA50 when Stochastic has not entered the oversold zone.

Conclude

In order to grasp the power of Stochastic, Traders cannot use it mechanically. That is also why trading robots mostly fail. It is necessary to understand your own trading style as well as the latency and noise that you accept before deciding to set parameters for the Stochastic indicator. Also, don't forget to combine it with the tools listed above to improve your trading performance.

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