Slow stochastic trading strategy

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Slow stochastic trading strategyCOMPONENTS

Slow Stochastic Oscillator (the average is not used)

Stochastic setting: 14 period, %K 3

Bollinger Bands: 20,2


This slow stochastic trading strategy does not use the typical crossover methods of the stochastic indicator. Generally, traders will use this oscillator to trade crossovers of the %K line and %D line.

Their buy signal occurs when the %K line crosses above the %D line and vice versa for a sell signal. Or they might wait for divergences to occur relative to price when the indicator is above or below the 80 - 20 lines and then initiate a trade. Others use a crossover of either of the %K or %D lines below 80 for a sell signal and above 20 for a buy signal. To each his own.

The following method does not use the average of the slow stochastic -- only the %K line.

This strategy could be classified as a counter-trend method since it anticipates a bounce off the Bollinger Bands and a return to the 20 period moving average. Although, a touch of the Bollinger Bands is only half of the requirement for this setup/trigger to be initiated. The theory here is that price moves in waves between oversold and overbought conditions and the stochastic can used in conjunction with the bands to determine when price will snap back to at least it's mean for a profit.

Conventional wisdom says, when the slow stochastic is at or above 80, the stock is considered overbought. When price is at 20 or below, the stock is oversold. But is it really overbought or oversold? Only when the stock is in a trading range. Keep that in mind when reviewing this strategy. Otherwise the 80 - 20 lines are meaningless. If the stock goes into a major uptrend, the indicator will just keep popping above 80. So make sure if you're going to try any counter-trend strategy like this, be aware that when trading against the trend, price can move ultra fast in the opposite direction of your trade. So you better know in advance how you're going to get out!

OK, so here's how this one works:

Buy Setup: The current price bar has touched the lower Bollinger Band OR the Stochastic line is below 20.

Buy Trigger: At the CLOSE of the bar, price has touched the lower Bollinger Band AND the Stochastic line is below 20.

Exit: When price reaches the 20 sma.

Short Setup: The current price bar has touched the upper Bollinger Band OR the Stochastic line is above 80.

Short Trigger: At the CLOSE of the bar, price has touched the upper Bollinger Band AND the Stochastic line is above 80.

Exit: When price reaches the 20 sma.

The 5 min. chart of QQQQ below, demonstrates this strategy. Three short trades and two long trades are indicated on this particular day. The red/green lines indicate the bars that trigger the trades.

Depending on where a trader placed a stop, all but one of these trades would've been winners.

But, notice how on this day, QQQQ just meanders back and forth in a trading range. This is the kind of day the slow stochastic trading strategy will rake in the money.

What's going to happen on a trending day? You are going to be continually stopped out all day long.

Like the last long trade on the chart below, price will hit the Bollinger Band, the stochastic line will be below 20 triggering the trade, but then price will just keep moving down, again crossing the stochastic line below 20 and stopping you out.