How The Pro’s Trade Using Stochastic Technical Analysis

Hi Traders. Philip Thygesen here from
Before I start I just want to say that trading involves risk and hard work. So please do
your own due diligence before trading real money. Today I am going to talk about Stochastic.
I will give you some background information about Stochastic and then with the help of
some charts show you how you can improve your trading with this tool. Finally I will give
you some tips about how to best use Stochastic in conjunction with other indicators and /or
chart analysis. If you go to our website you will find a tab called education, technical
analysis and Stochastic. Here you will find a written summary including a chart showing
you how to use Stochastic in trading. This is made to make it easy for you to keep track
of the information. You might print this page out so you can have it in front of you while
writing your trading plan or back testing the ideas shown here.
Stochastic was invented by George Lane more than 50 years ago. Needless to say that the
reason for it still being around is the popularity of this tool. Stochastic is a momentum indicator
that tells us how strong or weak the current close is compared to the previous high/low
over a set numbers of bars. So if the close is consistently at the high range we see a
rising Stochastic. We are then experiencing buying. If we are seeing consistently a close
at the low range we are seeing a falling Stochastic. Which means we are experiencing selling .The
default settings for Stochastic is 14, 3, 3. Let me just quickly tell you what this
means so you know what you are trading. 14 means that Stochastic is calculated by using
the last 14 bars. 3 is a 3 simple Moving Average to smoothen the Stochastic to avoid noise
and fake signals and this 3 simple Moving Average is the Trigger Line. So Stochastic
Line, also called the %K, is the white one here and the Trigger Line also called %D is
a purple line. This signal occurs when we have a crossover. Of course the setting is
entirely up to the trader. Traders looking to scalp might use a 7,3,3 setting instead.
Like with all indicators, the lower the settings, the more whipsaws. So you have to back test
and forward test to see which suits you best. When Stochastic is below the Trigger Line
the momentum is to the downside. When Stochastic is above the trigger line the momentum is
to the upside however brief this momentum will be. Many traders believe that the overbought and
the oversold levels are the main use of Stochastic. When Stochastic is above 80 many traders will
look to go short and when Stochastic is below 20 many traders will look to go long. This
was not George Lanes idea with the Stochastic because Stochastic can stay overbought for
a long period of time. You see this here. However he did believe that the best signals
came after hitting these extremes so he will be looking for this crossover here and here
and here and avoid these crossovers. I will show you some trade examples and then I will
also show you how to avoid going short during these times here where Stochastic can stay
overbought for long period of time resulting in many losses. Ok. Here’s the same chart again but I want
to stay fresh so I can emphasize how important it is for you to analyze the stocks you are
about to trade instead of only focusing on the entries. And if we do analyze this stock
we will be able to avoid going short here and here. Just like I promised I would show
you. So first you look at your MA and see that it is uplosping so if you have a rule
in saying you are only allowed to go long when the MA is upsloping you would have avoided
going short here and here. But you catch these winners down here. Yes you would miss out
on these winners but that’s ok because it is not the quantity of trades, it is the quality
of the trades we are focusing on. So now I will show you how I would approach
this if I were to enter it. First look at your MA. It’s upsloping so the trend is
up. That means I will only take oversold levels. So go and locate those. We got an oversold
here and one here and third one here. And third I will be looking for crossover. The
Stochastic crossing up through the Trigger Line. Happening here and here and here. Because
no indicator is perfect you have to place your stops accordingly to the chart. So if
I enter the trade here I will be looking to place my stop underneath last swing pivot
low. When my entry is here I will place underneath last swing pivot low here. And here it has
a equal low with this one over here so I would place my stop underneath this low over here. Here’s another setup using Stochastic but
I have added Divergence to the trade. But before I show you the entry I want to do the
analysis. First I see that the MA is moving down but suddenly it stalls and moves sideways.
Price also oscillates around the MA. This tells me it is sideways market. That means
I can both go long and short. Second. I look for support areas. I see that this low is
equal with this low. So it seems that there is support down here. And third I look for
oversold Stochastic with Divergence. We got oversold here and Divergence because price
makes a lower low compared with this low and Stochastic makes a higher low compared to
this. And fourth I look for the crossover. The Stochastic crossing up through the Trigger
Line which happens here. This ends today’s video. I hope you have
enjoyed it.

46 thoughts on “How The Pro’s Trade Using Stochastic Technical Analysis

  1. The best explanation about trading the stochasting I've seen thus far! Great job man!

  2. The video tells us to only look for oversold (entering long) while the MA is heading up (it's an uptrend), and at the end, provides an example where this condition is not met. Perhaps this rules doesn't apply anymore in a sideways market? …

  3. @gan33 Yes this rules does not apply in sideways market. In an uptrend it is clear that the bulls are the strongest so there is no reason to go short and fight the strong bulls. In sideways market the bear and bulls are equally strong so there is no right side except choosing the right area of entry. Such as support (long) in sideways and resistance (short) in sideways. The MA in uptrend increase your odds. The support/resistance increase your odds in sideways.

  4. I have been paper trading and using online simulators for 4 yrs…this will help immensely.
    Great video.

  5. I'm new to trading and have read a lot on stochastics trading. I really like this way to trade, BUT where can I buy this software or what service is out there that I can pay for? Or are there free sites that I can use? I'm looking at only trading the DOW & the S&P 500 stocks at this time. Any help would be appreciated.
    Thank you.

  6. hey phillip, you are a great instructor and tutor, i am just amazed to learn so many hidden facts from all your tutorials which is strangely abent in all the others technicals indicator tutorials…please keepup the good work and thank you for dismantling trh ecomplex structure of these indicators in a more easily understandable manner , and in a way it reaches the nerver centre of a novice

  7. Thank you very much for kind words. Good to hear you find the videos helpful.

  8. why paper trade for 4 years..thats a little extensive…trust your skills and pull the trigger

  9. It is in almost every trading software you can find but try freestockcharts

  10. I would not use it on anything below 5 min. The higher the time frame the better. There is a lot of noise on the lower time frames.

  11. Great video. What length moving average do you usually use? Also, do you also use the MACD in addition to Stochastics?

  12. Hi

    I do not use MACD with Stochastic and never have and never will. The reason why is I believe they more or less shows the same; short term trend reversals. I suggest you read our section on leading, lagging and confirming indicators on our website. Free of course.

  13. Forgot to answer. We use 100 MA in this video but I suggest you watch our video on which length to choose. /watch?v=zRD9Ob9yCvs

  14. Problem with the stochastic is that it is hard to find where to place the stop. Apart from that I like it.

  15. and yet, it usually shows the best place to place them, but only if the price is already going the way you expect, what may pose a greater financial risk to your position and high risk/reward ratio.

  16. ALL Indicators are non sense its like trying to drive your car home while looking in the read view mirror……all these indicators looks great on 5 or 6 or 7 charts then the wheels come off BET THAT

  17. its a pretty interesting idea to assume many traders will look to get out at say 50% retracement.That would be true as I suppose it would be true also at other indicator "hotspots".

  18. hey great video.
    can u plz tell me when using this indicator on weekly,monthly charts what typical values should i put.
    i use i basically want to know what to put in the filter.

  19. Hi mark… On this video, I noticed that on your explanation you used a 100 MA, and a 20 MA to explain the over bought and the over sold stochastic levels on the same 15 minute chart on APPL…why? I would think that consistency is better for the audience. I hope this doesn't upset you, and in no way I'm good in trading… I just noticed this changes in you explanation.

    Thank you
    "Trade with Knowledge, not with emotions"

  20. try 4H charts with 20 period and 120 period bollinger band overlays. Take entries at engulfing bars that present themselves on the extremes (outer bands). The 120 on the 4H corresponds to the 20 period bollinger band on the daily chart.

  21. please is d divergence still valid to sell the market, if the price chart is making lower highs while the stochastic is making higher highs? please answer thanks

  22. Hello there… why your website is not working ?u r imparting the good stuff.

  23. hi sir.i'have question, which ma is used in this video & timeframe?

  24. thank you so much for sharing the knowledge….. 🙂
    can I ask what is the value of the MA used? I am using 50SMA is it good already for this strategy?
    thank you so much in advance 🙂
    Bless you 🙂

  25. A lot of pros don't use any kind of indicators at all, with the exception of moving averages.

  26. Very informative video. Good to see you again. Good luck.Keep it up.God Bless you.

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