Stochastics - 2 Ways To Make It More Reliable

The stochastics indicator is a popular oscillator that many technicians like to use when trading the markets but like with most indicators they have a poor track record. If used correctly, the stochastics indicator can actually be profitable by simply focusing on trading with the trend and trading at support and resistance.

Above we have a 60 min chart of QCOM with the stochastics oscillator in the lower panel using the standard default setting of 14 bars. The first thing I like to do when analyzing a chart is to determine the trend. Trading in the direction of the trend  puts the odds tremendously in your favor as the moves tend to be much larger in price and time than counter trend trades. There are many ways to determine the trend but I like to keep things simple and just look at the swing points and ask the question, is the market making higher highs and higher lows or lower highs and lower lows?  If the swings are moving higher then the trend is up and I will look to take buy signals only using the stochastics indicator.

The next piece of information that I look for is where is the support and resistance. If the trend is up as it is in the above chart example, I will look to buy when the stochastics are oversold and price is also testing a support area. Taking buy signals in the oscillator that also coincides with a support level can increase the likelihood of that buy signal working.

There are two forms of support that I look for on a chart. One is a test of a previous swing low and the other is when the market breaks out above resistance and now comes back to test that resistance area which should now act as support. Both examples of support can be seen in the above chart.

So there you have it, two simple ways to increase your odds of capturing a profitable trade using the stochastics indicator. Trade with the trend and trade when the stochastics are overbought/oversold and support/resistance is also being tested.