i thought divergence meant that the stock is moving one way, and the indicator is saying it should move the other way, prompting a big reversal in the stock. in my example, i'm using stochastic overbought/oversold conditions to filter out possible lower hi/higher lo candidates.
no no no no, you don't mark the bottom until stochastics has crossed above 30, so u only mark one low every time stochastics crosses below 30 and then above 30. same with oversold. basically, from may 9 to july 14, that was ONE oversold period. you don't measure the low until after stochastics has crossed above 30. plus, i'm not measuring the extent of how far stochastics is falling/rising. I'm just looking at the lo and high for every single overbought or oversold period.
when stochastics cross above 30, from an oversold period, the low that was measured in that oversold period is your cut loss point. Your profit taking point would be at the stochastics overbought point. you can get the picture for shorting from an overbought period.
im trying to understand your strategy, but it looks like you didn't follow your rules for july 24th, that was higher than the april 11th low, but you didn't go long. it seems interesting though, why not run it on more stocks and more time frames?
july 24th was not an oversold condition for stochastics. the last two oversold periods were april 10 to april 20 and may 9 to july 15. the low for the oversold period between april 10 and april 20 was around 35 and the low from may 9 to july 15 was below 20. since 20 < 35, i do not get long. NOW, look at the next oversold period from august 16 to august 28. what was the low in that period? it looks like the price was around 28. so since 28 is greater than the low from the last oversold period (below 20), you go long there since HIGHER lo. i hope this is clear.
This is easy to backtest, what you are missing though is stop/risk management which is crucial in trading. I'm sure coders in ET can help you out with the backtest if you lack the coding experience. For what is worth I don't see anything of great value in your strategy but don't let me stop you in your research, our definitions of "greatness" might differ. Best of luck, Anek
dafong, this is similar to what I use & have researched for almost 15 years now. I use a different single indicator that isn't range bound like the Stochastic, I use specific levels to show "Overbought" and "Oversold" not percentages and I've worked out the problem with specific entries and exits. The HH/HL & LH/LL oscillations work but they have to be specifically defined for your trading to be consistently profitable. I use them on three separate fractal levels to show Trend (Longer Term) and minor oscillations (Trading opportunity areas) and finally enter/exit oscillations. You can get this to work using the Sto or MACD but there are other indicators that aren't range bound and are a lot smoother. Try using Constant Volume Bar Charts to smooth things out further as well.
I use the Ergodic but I imagine you could find one from http://www.jurikres.com . Shame you don't have access to better charting.