An effective tool in trading should enable you to make money from the markets or at least improve your risk management.
One of the most popular technical indicators that you will certainly have heard of, is the Stochastics indicator.
Here I will do a preliminary test into how well the stochastics indicator still serves as an effective signal to buy or sell in the markets.
According to this Investopedia article, it was developed by George Lane somewhere in the 1950s.
The stochastics indicator identifies when a market is oversold or overbought.
In the version of this indicator I'm using, there are 3 distinct lines, the %D, %K and smoothed %D line.
There are many ways to use this indicator, so I'm going to use the crossover between the %D and smoothed %D lines to trigger my entries.
I decided that valid bullish crossover signals should happen below the 20 level, while valid bearish crossover signals should happen above the 80 level.
Then we will buy or sell on the next candle's open.
Here’s a picture describing an example of the bullish and bearish signals:
(Red line = Smoothed %D, Blue line = %D)
Armed with my Stochastics indicator on a default setting of (14,3,3), I took a walk onto the US equities battlefield... and found some interesting results.
The companies are Tesla, Ford and Coca-cola
These test are conducted on the weekly chart from about 2014 to about the middle of 2019
My expectations going into this are:
And the results are below.
Tesla:
Ford:
Coca-cola:
I've made a few observations about potential ways in which we can improve the performance of using stochastic indicator in our trading.
A few of my observations are:
I did a rough test on 5 random popular large cap stocks, and these are 3 of the positive results.
That's a surprisingly good hit rate!
If we went to do this backtest on 100 stocks, how many stocks do you think it would work on?
Among the 100 stocks, do you think we can identify similarities in stocks where it would work well on?
There is, of course, a lot more research which can done and from many different angles.
But a preliminary observation like this, does seem to suggest that our common stochastic indicator can still pull in the dollars from the markets.
The key might lay in identifying what type of volatility we can apply it in and a pinch of basic risk management goes a long way.
If you delve deeper into this, do share your thoughts or results.
Good trading!
The post Is the Stochastics indicator still an effective trading tool? appeared first on The Systematic Trader | Trading Courses | Collin Seow.
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