Stochastic in a range
Mean reversion · Difficulty: Intermediate
The idea
The Stochastic oscillator shows where the close sits within the recent high-low range. Low readings mean price is near the bottom of its range, and high readings the top.
Indicators and settings
Stochastic 14, 3, 3 with ADX 14 to confirm the market is not trending.
Entry rule
Only when ADX is below about 20 to 25 (no strong trend): consider a long when %K crosses above %D while both are below 20.
Exit rule
Exit as the stochastic rises toward 80, or at the middle of the range.
Stop-loss and risk rule
Stop just below the range low. If ADX starts rising strongly, close out.
Best conditions
Sideways, choppy markets.
Pitfalls
- Very noisy: frequent false crosses.
- Useless or harmful in strong trends.
- RSI and Stochastic say similar things, so using both adds little.
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Illustration only; ignores slippage, tax and most costs. Not financial advice.