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msg #83892
Ignore einok
12/5/2009 2:49:26 PM

265 posts
msg #83902
Ignore trendscanner
12/6/2009 7:03:58 AM

Hi Erik. It's not clear to me how you would make trades using this approach, such as what would be your entry point, what time frame you would be trying to stay in the trade (minutes, hours days?) or what your exit criteria would be. You might have great success with this approach but my first impression is that it might be challenging to be consistently profitable using Fast Stochastic as the key indicator for bullish/bearish trend, and how you're interpreting it. Fast Stochastic was developed as a momentum oscillator, rather than a trending indicator, so I would expect this system to produce a lot of whipsaws.

You're proposing, in part, to use a stock being above a value of Fast Stochastic > 80 for 2 days as a bearish indicator. Here's what stockcharts. com mentions about what George Lane, the developer of the Stochastic indicator, thought about the high and low stochastic readings:

"Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A security can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20.

Buy and sell signals can also be given when %K crosses above or below %D. However, crossover signals are quite frequent and can result in a lot of whipsaws.

One of the most reliable signals is to wait for a divergence to develop from overbought or oversold levels. Once the oscillator reaches overbought levels, wait for a negative divergence to develop and then a cross below 80. This usually requires a double dip below 80 and the second dip results in the sell signal. For a buy signal, wait for a positive divergence to develop after the indicator moves below 20. This will usually require a trader to disregard the first break above 20. After the positive divergence forms, the second break above 20 confirms the divergence and a buy signal is given. "

As an example of how the market or a security can stay above 80 for more than 2 days, look at the results from the filter below. If you had entered a bearish trade for these after 2 days above a Stoch reading of 80, you would have either lost signficantly or gotten stopped out, since the Fast K has stayed above 80 for 10 days and these stocks have increased signficiantly during that time.

close > 1
Count(Fast Stochastics Fast %K(20) > 80, 10) > 9

I'm not saying you can't be successful with this system and perhaps I've misunderstood how you propose to interpret the signals. But you may want to paper trade it for a while until you figure out what the best method for entering and exiting are and how to be consistently profitable. I think the idea from stockcharts about looking for divergences makes some sense.

Hope this helps

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