Trading Markets With Stochastics
by Louis M. Lupo
There are many systems for trading these days, some of them good, some not. Here's a reliable pattern
for trading markets using stochastic.
Of the computerized trading systems and discretionary systems I have traded and developed, some
needed refinement, some needed reworking, and some were simply cannonfodder. However, one system
that has continued to perform in every hostile trading environment imaginable is the stochastic pattern
recognition system. Let me briefly discuss the theory behind the system and describe the parameters of
one particularly reliable stochastic pattern. I will then apply the parameters in a simple mechanical
STOCHASTIC PATTERN RECOGNITION THEORY
By its very design, the stochastic is a momentum indicator. All stochastics referred to here will be a
14-bar close, slow stochastic with a three-bar smoothing. The stochastic, as opposed to other momentum
oscillators, measures the location of the most recent market price in relation to the highest and lowest
prices within the last 14 bars, not the price 14 bars earlier.