Hi traders,
Today I will explain how I use the Stochastic indicator in my methodology. With some screen time and study in the off hours I believe you to may discover like I have that the Stochastic indicator tells you more than maybe you 1st thought when you understand it this way.
Many books out there explain the
divergence as the key signal on this. They are correct but I feel they describe it the wrong way and causes you to have a lot of losing trades, at least I did in the past.
There are 2 types of
divergences a "Standard Divergence" and a "Hidden Divergence"
Standard Divergence - Price makes a lower low and the Stochastic makes a higher low or price makes a higher high and the Stochastic makes a lower high.
Hidden Divergence - Price makes a
double bottom or a higher low and the Stochastic makes a lower low, or price makes a
double top or lower high and Stochastic makes a higher high
As I have made mention of in this forum and my manual I never ever take a trade aginst the trend of the 1508 chart. I also follow the rule you can't be in an uptrend making lower lows - nor can you be in an downtrend making higher highs. These rules must be followed to be successful with this system. This sytem is not the only way to trade successfully I know, but it is the way I make money.
So with that in mind my rules are going to self eliminate a lot of the divergence signals and will most likely have you trading on the right side of the market. I in essence am using the Stochastic to confirm entries on the well talked about "W" bottoms and "M" tops that occur WITH the trend not against it.
take a look at this trade, this is 1 of the trades that setup yesterday that I missed because I was bored - lol
1. look at this 1508 chart the candle with the green 3 arrows under it, it is the 1st bar that closed making a higher high. the body of the candle closed above the prior lower high marked as "LH" on the chart
Attachment 39485
2. Now look at this 377 chart - it will seem confusing at first as it is probably language you have not heard or read before but this is the difference between watching indicators and trading
price action
1. look at where I have marked the LH and then the HH, this is what I mean by always looking left to trade on the right
2. Now Remember the rule "You can't be in a downtrend making higher highs, we just made a higher high - right
3. My rules state "ZIGZAG can't make a higher high in a downtrend retracement if it does a Stochastic divergence must take place to consider a trade"
4. Now if you look at the candle that has the 3 red arrows on it and look down at the Stochastic that is a standard divergence on a double top, thats a trade entry ? or is it
5. that candle with the 3 red arrows is where the bar closed on the 1508 that made a higher high so NO it is not a trade but many inexperienced traders went short there. Remember the 1508 chart MUST be right and you must always be aware of where price is on it
6. On the 377 now look 4 bars to the right of the 3 arrow bar. You now have a triple top and another divergence in the Stochastic. this time it is a hidden divergence as %K of the Stochastic made a higher high than the previous swing but price did not make a higher high. remember again the 1508 chart has already made a higher so we are looking for a retrace to get long - but yet again inexperienced traders went short here again thinking well the 1st short did not work the big money just ran their stops.
7. if need be look at the 1508 chart again and notice the red down candle that comes back to test the 13 MA 2 bars to the right of the green arrows bar
8. go back to the 377 and notice point #1 and point 2. it is a double bottom - right
9 compare
points 4 & 5 on the Stochastic below - that is the hidden divergence price makes a double bottom Stochastic makes a lower low - look for entry here
10. Look at point #3 the candle closes above the trigger lines and the Keltner is leaning up, go long on the close of that bar.
11. inexperienced traders lost on 2 short trades and we were patient and went long and made $525 as the inexperienced traders got caught on the wrong side of the market by not understanding price action
Attachment 39488
I know that seems very confusing to some - but do some home work and look for this pattern it happens everyday somewhere
Lets look at a couple of more that are not so complex as that one was
I have only posted the 377 chart as take my word for it the 1508 was setup right
1. Look at point #1 & 2 you have a lower high and see where the Stochastic is
2. Look at points 3 & 4 price makes a higher high and so does the Stochastic - no trade entry there
3. Look at points 5 & 6 price makes a double top Stochastic makes a standard divergence lower high - see it go short
4. If you miss that one look at points 7 & 8 price makes a lower high look at the ZigZag swings to the immediate left
5. Stochastic makes a higher high does it not, go short
Attachment 39489
please study your charts and see these patterns they are very powerful and a big part of my methodology nuances
please ask questions here or at my email
[email protected]. if sending a question by email please add a snapshot of your charts so I can verify your understanding of these patterns