Solid Technical Analysis Indicators Do Not Have To Be Complex
This slight modification is necessary to turbo charger the Stochastic for short term trading and creates one of the best technical indicators for short term market swings.
Pick Stocks or Other Markets that are Technically Trending Strongly
The first thing you need to do is make sure that you select stocks or any other market that’s trending strongly. If you need some basic tips on finding trending markets or what qualifies as a trending market, you can review several videos that I previously created that demonstrate this step.
The Stochastic Indicator works much better for retracements than for picking tops and bottoms. Therefore you want to find a stock or any other market that’s trending strongly either up or down.
Both have to be below 20 but the second one has to be higher than the first one. There should also be divergence between the second bottom and the market you are trading, in plain English this means the stock or other market you are trading must not drop very much compared to the indicator.
Here’s an example so you can see what I mean
The modified Stochastic Indicator makes a second bottom but it’s not as low as the first one.
Notice the strong divergence between stock’s price and the indicator; this is the type of divergence you want to see.
Another great example of the Stair Step method in action.
The Stochastic drops to below 20 but the stock barely lost 2 points, this is good divergence between the indicator and the stock. The second low is higher as well.
The second top is above 80 but still lower than the first one.
In the example below you can see how the Stair Step Strategy works with stocks trending down. You can tell by looking at Big Blue that the second high is lower but still manages to go above 80.
Also notice how IBM barely rises while the indicator hits bought level, this is the divergence I’m talking about. I hope you can see why the Stochastic Indicator has been around for over 50 years but remains one of the best technical indicators that are publicly available.
I typically avoid stocks under $20 dollars when I go long. This rule doesn’t apply when you shorting stocks.
Another great example of the Stair Step Method in action; Micron stock has been one of the most popular Short Term Trading Stocks around for over 15 years.
DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.