Magic With Stochastics

History

George Lane was the originator of the sochastics in the 1970's. Lane observed that as prices increase in an up trend, closing prices tend to be closer to the upper end of bars and in a down trend closing prices tend to be nearer the lower end of bars. Lane developed stochastics to discern the relationship between the closing price and the high and low of a bar.

Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and %D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are considered overbought and readings below 20 are considered oversold.

Stochastics can also be use to generate buy and sell signals. When the faster %K line crosses above the slower %D line and the lines are below 20, a buy signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a sell signal is generated.

My Own use Of Stochastics

Well as usual just to be contrary to everyone I don't use the stochastics to signal overbought or oversold although I do take note of the readings.

I like to use them as possible buy and sell opportunities after defining a trend. If the trend is up as in the example below on the AUD (Australian Dollar) I like to only take buy signals regardless of the reading as long as the trend remains in place.

I ignore the sell signals. I purposefully weaken the stochastics to give me more signals and I use 8,3,3 as my settings.

This gives more signals and shows the hand of the weaker players. The same is true of selling in a down trend. I ignore the buy signals and only take the sell signals. I don't use stochastics on their own as trading method as all the settings I have tried ultimately resulted in to many wipsaws. Experiment with different settings and consider adding this indicator to your trading arsenal.

Good Trading

Mark McRae

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice.

STARC Bands

In this lesson we are going to look at a trading method using "STARC" bands. I have been experimenting with these bands for a few weeks now and I think they have some real potential as a trading method.

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Finding entry and exit points using some form of bands around price have been used for trading for many years. I like starc bands because they are based on the Average True Range (ATR), as opposed to a simple average. The name "starc" is derived from the inventor Manning Stoller Average Range Channel (STARC).

Stoller originally used a 15 period ATR that is double or subtracted from a 5 or 6 period moving average.

The upper band is known as starc + and the lower and is known as starc -. Regardless of how you use these bands they are well worth watching, if for no other reason than to stop you entering the market at the wrong place.

It is uncommon for price to exceed the starc bands. Therefore, when it does, it is a warning signal. You would not enter any short position when the price has closed below or is close the lower starc band. It would also not be wise to consider entering any long positions when the price has closed above or is close to the upper band. Have a look at the first chart.

Now as my long term subscribers know - I always like to look for different uses for indictors and this is no exception. I like to have the ATR set at 21 and the MA set at 13. I also like to add a 13 period moving average as the center line. This results in more instances where price actually passes through the bands.

If you mess around with the bands for any length of time, you will notice that when there is a close above or very close to the upper band after it has been in a downtrend then the price tends to stay in that direction (up) until there is a close below or near the lower band. Look at the next chart:

As you can see from the chart above there is usually a fair period of time between the setup changing from long to short. This gives us a trading opportunity. Here is what I have been working with: Once the chart set's up with a penetration of one of the bands, watch for the retracement for an entry.

As you can see from the chart above there is usually a fair period of time between the setup changing from long to short. This gives us a trading opportunity. Here is what I have been working with: Once the chart set's up with a penetration of one of the bands, watch for the retracement for an entry.

The last chart, is a trade. The set up was when the red candle closed below the lower starc band. Next, we need to wait for a retracement. The actual retracement formed a little bear flag (sloping rectangle), which allowed us to draw some trend lines. The entry can be made in one of two ways. As price makes its way back to the center line, you could follow the low of each candle with an entry order or you can enter on a breach of the lower bear flag trend line.

As it happened, the breach of the trend line and the low of the candle happened at almost the same time. Once entered, you can place a stop loss above the peak or high of the entry bar. This only leaves a target. Once in the trade I like to use the center line as stop loss. If we have a close above the center line, then it is time to exit. You could also measure the distance between the two lines of the bear flag and project it down. The only reason I didn't use that method on this particular trade was that a flag projection down would have taken me past the most recent low, which was past support. If the bear flag projection down had been higher than the most resent support then I would have used that method as a target.

Play around with starc bands. I am sure that they will help you in your trading.

Pivot Points

Those of you who have been trading for a while will be familiar with Pivot Points. During this lesson I want to go over how to find a Pivot Point and also a slightly different method of using them. First let's look at how you calculate a Pivot Point.

Using a bar chart you will observe that each bar has an Open, High, Low and Close. This information represents all price activity during that particular period.

In the case of the following example, we shall use a daily bar. To calculate the pivot point all you need to do is add the High, Low and Close. Once this has been done you next divide the total by three, e.g. the cash FTSE on the 2nd May 02 had a High of 5192.70, a low of 5125.50, and a close of 5174.10. If you add the three together, you get 15492.3. You then divide that total by three to get a Pivot Point of 5164.10.

......

OK, so far so good, but what do you do with this information? Well, one technique I like to use intra day is to use the pivot point as a trend indicator. We already know that the Pivot Point for the 2nd May was 5164.10 and we will use this the next day as an intra day trend indicator.

If the price is above 5164.10, then I would only be long and if it were below 5164.10, I would only be short.

As price can fluctuate around any given point I also add a further proviso. If I have support close to 5164.10, I will first wait for the price to pass through 5164.10 and support before entering short. If I have resistance close to 5164.10, I will first wait for the price to move through the Pivot Point and
resistance before entering long.

This method becomes even more powerful when the Pivot Point is close to the opening price. If, for example, the opening price is 5174.10, the Pivot Point is 5164.10, and I eventually go short at 5155, I can stay short the whole day as long as it does not go above the Pivot Point.

Once in a position I normally have a very tight stop to begin with and then will follow the market with a trailing stop to lock in profits.

Another way I like to add Pivot Points to my analysis is for more long-term projections. I will use the Pivot Point of a Yearly, Monthly and Weekly chart. In this case it would be the High, Low and Close of the previous Year, Month and Week.

I like to think of the weekly Pivot Point as the short-term trend, the monthly as the medium term trend and the Yearly as the long-term trend. I find this particularly useful in Spot Forex. If I am below the yearly, monthly and weekly Pivot Point, I know I am in a strong down trend and I can scale into multiple positions over time. The same holds true for long positions.

The point is there are many ways to determine trend. You can also use Pivot Point to find potential Support and Resistance, which we will cover in later lessons.

Experiment with Pivot Points and see if it suits your trading style. At the very least it is always handy to know where they are and it may help you decide which side of the market you should be trading from.