The Stochastic Indicator

Discussion in 'Technical Analysis' started by jack hershey, Feb 17, 2003.

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  1. You can see here how not combining Magee, et al with indicators is a disadvantage in being able to think through what indicators are telling a person.

    Apparently the boat Nitro, inandlong, and oldtrader occupy is one where they haven't as yet gotten the indicators now available to reinforce their intial TA understanding.

    This is not a complicated process especially if you have a long history with the market.

    To get the stochastics straight, you can do two exercises:

    First, just use it on paces of the market that are definitive (fast paces only).

    Second, set up three defaults on the stochastics to find out what the settings are for. Use the original and Pring's new setting for good extremes. Pick another intermediate one to show parts of the others.

    It will be quite clear where oldtrader's screw up that he currently holds. "overbought" to oldtrader says "here is a signal for you to take action". He apparently does not know what the action is that he should take because he takes the opposite knowing that he has a paradoxical view. By doing the two steps he can cure himself since he is already half way there. The second one will be most illuminating to him. Once he calibrates himself on stochastics he can see that his TA vis a vis Magee and the proper understanding of stochastics is in perfect correspondence.

    we all have to work through each opportunity that shows up to get to the best place. It is worth the effort instead of saying you like being stuck in a place instead.

  2. Jack...

    Interesting reply; good point(s)

    In fact over the past months been thinking over what you allude to, i.e. enhancing one's decisions by additional input to an already solid foundational understanding. However the more I'm in the markets... and the simpler it's kept, the better it goes (for me). Yes I do utilize some other indicators. But have no doubt that too many nouveau traders believe "more is more" (or more is better)... when (imho) some of the best on-floor and off-floor/screen traders know that "less is (often) more".

    Would be interested in any insights on my premise.
  3. Do people really need stochastics to tell them something is reversing from an "oversold" condition? If you trade a single vehicle, whether it be a stock or future, and are capable of sitting down and watching it day in, day out, noting where the levels of resistance and volume are, you will be way ahead of any price/volume derived indicator out there.
  4. Maverick1


    Why use indicators as reinforcement? Imho, you either understand and 'get' a setup, or you don't. If you're not confident about what price and volume tells you, then chances are you don't fully grasp the market dynamics. There is a good probability that a need to look to the indicators would then serve as a crutch more than anything else. Think about it, did Livermore, Gann, Richard Dennis and all the other big names use indicators, I really doubt it. The real ephiphany, for me, occurs when one can understand the dynamics of supply and demand as evidenced by
    the relationship of ohlc to each other and across days.

    But then again, whatever works for you should be the ultimate judge. I'm not advocating one style over another, although that I only use P/V.
  5. Stochastics has really gotten beat up by folks.

    Old observed that during "oversold" is when he sees the market still.....etc

    now you see the "oversold" condition.... as something reversing from something......

    Look at ES on the 5 min today (17 FEB 03) using beginner's 14, 1, 3. Now that's oversold!!!

    A relative indicator is always going to be at an extreme under these conditions.

    It looks like people see coming into "oversold" as a signal. Well it is, of course. It is an entry signal for fast pace markets and a "hold" signal for all other paces.

    You also get to know that a prolonged "oversold" indicates what?......the answer is a lateral period of congestion leading to convergence and centering. where will the Stochastics arrive at at the end of this pattern of three formations?? Where else but on neutral....because it is a relativeistic indicator and 50% is neutral point.

    Reversals?? What is the indicator sequence for reversals on stochastics?

    Well there are three kinds of trends and only two pairs of them can lead to reversals. The other two pairs have as a first trend a lateral trend.

    When can you reverse? Not until you are making about 150,000 a year per contract on the ES.

    Its best to do a wash trade several times a week as a warm up for reversals. Once you can do wash trades any day of the week you can then see where revrersals are possibilities and how to extract yourself when you need to.

    If the pace is fast and you are picking off 10 or more points on an ES trend, then you are seeing "overbought" all during your hold period. When you slip out of the trade, the stochastic is headed out of overbought and NOT to a reversal. Now that it is gone from "overbought" it goes to one of two places. the first place it must hit is neutral. From neutral it can chosse to reform into the prior trend (rezoom as they say) or cool off from the prior trend into an opposite trend. No reversal here though neutral comes first.

    When you get to slower trends than fast paced you will see all the typical formation pattern folk use.

    a long trend at a slow pace with the 20 80 taped (intermediate level trading) looks like icebergs flaoting in a row (count three usually. You enter when "over sold" appears as firt iceberg. You hold thorugh the second and third iceberg. You didn't exit like in fast pace because the "oversold was" sustained... old notices this.

    You exit only when the lines come out the other side of the tape which proves there are no more "rezooms". Each iceberg is, of course, a rezoom.

    yuo can see how by building on the "fast pace only" beginner thing and including slow paces too that you creep up from 90,000 a year beginner level per contract to 150,000 by adding slow pace.

    I know that the effort of using an indiocator like stochastics to get started is not pleasant...maybe. to me it seems a good way to understand the market better and get into learning what sequences of patterns or indicator signals mean.

    We still aren't able to trade reversals. first you have to do two more things. To get ready.

    If anybody is reversing out of "overbought and is pulling down less than 150,000 per year. just stopping what you are doing will put you further into the chips.

    who knows maybe we can get a little milage out of indicators after all.

    KISS is a nice place to be.

    if my stuff is hard to read to one of two things: use a yellow high liner to accent stuff. Or second after you highlight use black to kill about half the rest. Do not cross out the annual money made; you need to underline that in green.
  6. jem


    Jack - you may be a very good teacher and you seem to be giving away information you feel important, but you are using words and phrases in a way that is vexing to most readers.

    I have no real idea what a tapped stochastic is although I am guessing from the context you suggest people not pay attenion to the 20-80 range or whatever your settings are. Your pacing a market is obviously something you have defined. You have also used many other words in esoteric ways. As I find your statements interesting I would appreciate a reference to a JH approved dictionary or greater use of traditional trader speak.

    By the way this is not meant to be insulting because while I am a bit doubious of your claims of a begginner making 3x his money (at the first level) I would love to see it done. I would love to do it myself as I have had to change my methods to cope with the current market conditions and I assure you that while I use to triple my money every year, I have not done so recently.

    P.S. I just saw you made a long post so if you defined things you can ignore the above.
  7. There you go. Good luck!
  8. Jack, why do you prefer one stochastics setup over the other? Could you tell us which one you use in what conditions and for what time frames?

    I have no personal preferences in this matter, for me it is a time frame that matters more than a particular set of stochastics parameters. For instance, some stochastics bullish in the1 min chart may not be that bullish in the 3 min chart, their parameters being the same.
  9. trendy


    Mr. Hershey, I have read some of your postings here, and I have a question on methodology. Assuming a 5 min. chart is being used, and both stochastic lines breach either the upper or lower band, is the proper methodology to wait until the close of that 5 min. bar to ensure that the stochastic lines do not retrace?

    Also, what is the entry point? Is it above the high of that last 5 min. bar, or is it above the close of that bar, or is it something else?

    Thanks for your consideration
  10. Ditch


    Some people just don't know how to use the stochastic. Take a look at the attached chart. Every time the fast stoch pulled back to 80 you would have had an excellent short entry.
    #10     Feb 18, 2003
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