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ScoopyJ

Thoughts on Slow Stochastics and RSI?

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I'm new to this site and pretty much trading in general. So far my main system of trading is by finding stocks that are in oversold territories both in slow stochastics and RSI. What are some experienced opinions in using the two combined oscillators for entry and exit points? What are some better "setups"?

thanks

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Using the RSI as you describe can work well, but you'll need to use a much shorter lookback period or 'length' setting. Default settings demonstrate no edge. The Stochastics is less useful - stick with the RSI with a setting of around 4 (intraday), or even 2(swing trading), and then combine with a simple trend filter, such as only taking long entries when the RSI is oversold but above a 200 period moving average. Another useful indicator to consider for this type of strategy is the Commodity Channel Index.

 

I hope that's helpful to you . . .

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Using the RSI as you describe can work well, but you'll need to use a much shorter lookback period or 'length' setting. Default settings demonstrate no edge. The Stochastics is less useful - stick with the RSI with a setting of around 4 (intraday), or even 2(swing trading), and then combine with a simple trend filter, such as only taking long entries when the RSI is oversold but above a 200 period moving average. Another useful indicator to consider for this type of strategy is the Commodity Channel Index.

 

I hope that's helpful to you . . .

 

this was very helpful, thank you! the modified settings are looking good, im trying to focus on swing trades. What are the benefits of comparing the price to the 200D moving average?

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this was very helpful, thank you! the modified settings are looking good, im trying to focus on swing trades. What are the benefits of comparing the price to the 200D moving average?

 

Glad that was useful to you. It's reassuring to hear that you're intending using this method for swing trading. Though this kind of strategy can be profitable intraday, you're on a lot less steady ground!

 

The purpose of the 200SMA is to provide a simple definition of the longer term trend. When the trend is up, and price is trading above the 200SMA, then when a pullback generates an oversold reading from the RSI this signals a long entry. So long entries are only taken above the SMA and short entries below.

 

This simple filter is remarkably effective. The 200 period MA is just suggested as a broad way of diferentiating between bull and bear markets, and by no means will it be optimal for every market. Trading the S&P500 index over the past ten years, for example, a 170SMA would have provided the best results. However, there are many pitfalls associated with over-optimisation of parameters and the curve-fitting of system variables to specific data sets that you should be wary of.

 

Someone else has posted regarding using the RSI for exits - this is an excellent suggestion, as it will provide a stop loss that adapts to changing market conditions.

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Glad that was useful to you. It's reassuring to hear that you're intending using this method for swing trading. Though this kind of strategy can be profitable intraday, you're on a lot less steady ground!

 

The purpose of the 200SMA is to provide a simple definition of the longer term trend. When the trend is up, and price is trading above the 200SMA, then when a pullback generates an oversold reading from the RSI this signals a long entry. So long entries are only taken above the SMA and short entries below.

 

This simple filter is remarkably effective. The 200 period MA is just suggested as a broad way of diferentiating between bull and bear markets, and by no means will it be optimal for every market. Trading the S&P500 index over the past ten years, for example, a 170SMA would have provided the best results. However, there are many pitfalls associated with over-optimisation of parameters and the curve-fitting of system variables to specific data sets that you should be wary of.

 

Someone else has posted regarding using the RSI for exits - this is an excellent suggestion, as it will provide a stop loss that adapts to changing market conditions.

 

Cool stuff, thanks! I'm interested in intraday trading but im actually still in high school right now so thats out of the question for a while :haha:

What settings would you suggest for swing trades with a range of about 2-6 days, so that i wont be on "a lot less steady ground" ??

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Cool stuff, thanks! I'm interested in intraday trading but im actually still in high school right now so thats out of the question for a while :haha:

What settings would you suggest for swing trades with a range of about 2-6 days, so that i wont be on "a lot less steady ground" ??

 

You're much better off starting out with swing trading in my opinion.

 

The settings that I've suggested above are an ideal non-optimised solution for most instruments where this strategy will work. If anything, I would consider optimising the length of the SMA used for trend filtering before I would consider optimising the RSI settings.

 

What are you trading - individual stocks, futures, forex?

 

This type of strategy will work best in markets that show less inclination to trend and more tendency to trade back in the direction from which they've just come - the S&P500 (and instruments that track it such as the @ES futures contract or the SPY ('Spider') Exchange Traded Fund) are probably the best examples of this.

 

You might also like to look at the British Pound, Gold, or other indices such as the FTSE, DAX, or Nikkei.

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When I tested my strategy with RSI, what I found was that its performance varies with what stocks you are trading. On one stock, RSI with particular value seemed to work well, and on another, the same strategy actually backfired. You may want to test your strategy with Virtual stock trading site like http://www.strategyard.com/ before you invest in the actual market. I also suggest you pick a few companies, learn their chart patterns, volatility and execute your strategy only on them.

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Stochastics is just another oscillator and has it's place if you know how to read it...but it should not be used as a simple cross-over.

 

I suggest the CCI as was mentioned earlier.. In addition, Stoch can get you into a countertrend trade and can be very ugly if you are trying to position.or swing trade...with the trend..

 

I do use it just to keep an eye on cycles/rotations but not to trigger any trades..

 

If you are just starting out the best way to go is get an online simulater account... this will allow you to experiment and save your $ for education and not donate it to the traders retirement fund.. :) Also pick something that has volatility like an ETF or just a stock and get to know it... Once you learn technical analysis you can trade anything..it is almost all the same, notwithstanding volatility of some markets, thinness of volume but that is not your concern as a newbie...

 

Good luck...this is the best and also toughest business..

 

Regards,

 

Tom

 

Good luck..

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I have written code and back-tested RSI, MACD for all kinds of cross overs, RSI crossing 50, MACD crossing zero, and more. (Using AMIBroker) Then back-test this on thousands of stocks. If someone can really make money using these indicators alone I would sure like to see it.

 

If you have a strategy I would be willing to back-test it and post the results from AMIBroker.

 

Here is RSI(14) Crossing 50 and the results for all stocks under NYSE for the past 10 years. 15% Avg a year, 400% Return. Sounds good, well then look at the other stats 39% Winners, MAX Draw Down $94,000. See the attached report image.

 

xBuy = Cross(RSI(14),50);

xSell = Cross(50,RSI(14));

 

 

PlotBuy = ExRem(xBuy ,xSell);

PlotSell = ExRem(xSell ,xBuy );

 

Buy =PlotBuy ;

Sell = PlotSell ;

 

Short = PlotSell ;

Cover = PlotBuy ;

 

PlotShapes(shapeUpArrow * Buy, colorGreen, 0, Low );

PlotShapes(shapeDownArrow * Sell, colorRed, 0, High );

 

Test Results

 

RSI.jpg

 

 

Signals DIA

 

DIA.jpg

Edited by Handlowiec

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