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Chapter 12, Part IV. Stochastic. Part 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 20, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Estimation trend

    The general rule of trend estimation is the same as with MACD. When the fast line crosses the slow line from below and passes above it – the trend turns bullish. When the fast line crosses the slow one from above and passes below it – the trend is bearish, but these crosses should happen in extreme zones. This is the difference of Stochastic!

    1. When fast line crosses slow line in low extreme zone (0-25), passes above it and both lines move above 25 level of Stochastic – the trend turns bullish (Buy Signal);

    2. When fast line crosses the slow one in up extreme zone (75-100) from above, passes below it and both lines move below 75 level of Stochastic – the trend is bearish.

    The major error with using stochastic for that purpose is to think that the trend shifts when lines cross in extreme zone. No. Not only cross in extreme zone, but lines should move out from zone to create a signal of trend shifting. This is important.

    It leads us to important conclusion in applying Stochastic. Stochastic could show as many crosses as it wants in the extreme areas, but we will not treat it as trend shifting until the lines will move outside of this extreme zone.

    Now the time has come to take a look at rectangles on chart #1. Describe them for me, by applying rules that we’ve just pointed…
    Pipruit: Well, I see that Stochastic shows some crossing inside extreme zones, but the market continues its move in the same direction, and this move was significant. Trend has really shifted when Stochastic has shown final cross inside the zones and then lines passed out from there.​
    Commander in Pips: Yes, that’s it. Also I want to add, that Stochastic is better to use for intraday trend estimation, rather than on daily and higher time frames.
    Hamza Samiullah and fran alvarez like this.
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