Trading strategy with stochastic oscillator 2020: ADX indicator

The stochastic oscillator is an indicator that is particularly used in short-term trading. Like most oscillators, however, it has a weakness.

The stochastic oscillator is an indicator that is used particularly in short-term trading. Like most oscillators, the stochastic oscillator also has a weakness: it is inaccurate when determining trends, but its strength is the indication of possible turns. It is therefore a popular filter indicator, especially in sideways phases.

Stochastic oscillator

The name of the indicator is incorrectly based on the statistical area of ​​probability calculation. Stochastics is a statistical method that can be used, for example, to calculate the probability of winning the lottery.

However, the calculation of the indicator has little in common with this method. Basically, the developer of the indicator, George C. Lane, used a method similar to the RSI (Relative Strength Index). The assumption is made that the closing prices in an upward trend are always close to the highs and vice versa.

However, this assumption also means that the oscillator remains in high or low values ​​in trend phases and no statement whether the market is really overbought or oversold can be determined. Hence the use in sideways phases, where the indicator can fully exploit its strengths in identifying short-term turns.

To avoid such strong trend phases, the stochastic indicator is usually used together with a trend-determining indicator, to get filtering. A common trend-determining indicator would be the ADX (Average Directional Movement Index) indicator.

Trading strategy with the stochastic oscillator - 5 steps to the first trade

Traders can use strategies to increase their chances of winning increase, even if - as well as the strategy is well thought out - there is no guarantee of success and trading is always associated with a risk.

Trading strategy with stochastic oscillator 2020: ADX indicator

Strategy with stochastic and ADX indicator

The ADX indicator is a trend-setting indicator. However, it is also not very easy to interpret, because unfortunately it is particularly lagging. You have to evaluate it individually depending on the market situation. If the value is below 20, a sideways trend is assumed. However, it is quite possible that a new trend is emerging and the indicator is still below 20.

The following rules can be established for a strategy with stochastics and the ADX:

  1. Only to be bought / sold if there is a clear sideways phase (ADX<20).
  2. Only to be bought if the stochastic oscillator is below 20 and the fast line crosses the slow line from below.
  3. Only sold if the stochastic oscillator is above the 80 and the fast line crosses the slow line from top to bottom.
  4. If the ADX shows a clearly rising trend, no position is taken.

Let's take a look at this for the DAX future price.

It can be clearly seen that the stochastic oscillator fluctuates very strongly within the extreme values ​​20 and 80. However, the ADX indicator only showed a clear sideways phase once (green area). In addition, the trend of the ADX was falling below the 20, which also indicated the sideways trend.

The reverse case becomes clear in the phase after when the downtrend continued and the ADX indicator showed a rising trend ( blue line). In the sideways phase, the stochastic indicator was only in the extreme areas twice. According to the rules set out above, only the two trades should have been made.

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What looks very simple here is extremely difficult in practice - especially in application both indicators. However, if you have some experience in dealing with stochastics and the ADX, different strategies can be traded through the combination.

For example, you could have traded the trend using the signals in reverse. The rules would then look like this:

  1. Only bought / sold if the ADX indicator shows a rising trend.
  2. Only bought if the ADX indicator overflows a value of 20.
  3. Only sold if the stochastic indicator is between the values ​​20 and 80 - and therefore not in the extreme value range. Ideally, it remains within a narrow range.

It turns out that a trade would have arisen that could have made a good profit in the direction of the trend.

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Conclusion

When choosing indicators, there are no limits for traders. However, it is advisable to find out in advance what the individual indicators say and to understand in part how they are calculated. This alone makes it clear to most of them whether they personally consider the indicator to be meaningful in the analysis or not.

The handling of the stochastic oscillator is not quite simple, because it requires an additional filter and some experience. Trends cannot be traded so well with the indicator because it remains in a value range in trend phases. He shows his strengths especially in sideways phases.

Sideways phases are - especially if they are short - very difficult to identify in advance. Therefore, you use other indicators such as the ADX indicator or another trend-determining indicator.

With the broker Binary.com, traders can easily implement such strategies with little effort.

Trading strategy with stochastic oscillator 2020: ADX indicator

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