Use of the 3 stoch indicator in position play
The following material will present the stochastic oscillator used in the 3 stoch indicator and will discuss an example strategy for playing positions using the indicator. However, before we get to that, it is worth saying a few words about the stochastic oscillator itself. At the end of the article there is a code that allows you to enter the 3_stoch indicator in tradingview.
The stochastic oscillator (STOCH) was developed by George Lane in the 1950s. Lane believed that his indicator was a good way to measure momentum, which aims to objectively determine the pace of a given trading instrument, which is important because pace changes precede price changes. In an interview in 2007, he was quoted saying, "The stochastic oscillator measures price rush. If you visualize a rocket rising into the air - before it can turn back, it must slow down. Momentum always changes direction before the price. "
Stoch is a range-related oscillator, consisting of two lines that move between 0 and 100. The first line (known as% K), i.e. the faster moving average and the D% line, i.e. the slower moving average of moving SMA moving averages, which has task to smooth out the data in the chart.
For most indicators, as well as Stoch, all periods used can be set by the user individually for a given trading instrument. The default settings 14 and 3 are most often chosen. It is worth remembering that STOCH uses closing prices to determine the pace, so in this way we know that when% K crosses with D% around 20 indicates an increase in the buying rate. However, when the price is above 80 and% K with D% crosses, it means that the growth rate is weakening and there is sales pressure.
Sometimes there are discrepancies in the price movement with the movement of the stochastic oscillator. The occurrence of such a phenomenon is called divergence. It consists in the lack of confirmation of price movement through Stochastic Oscillator. Usually, divergence means a potential change in trend and is often a signal used by many traders because it is characterized by high efficiency.
Bullish divergence occurs when the price drops and Stochastic registers a higher level or remains at the same level.
As can be seen from the cited charts, after a rise in divergence the trend changed and the price increased.
Bearish divergence occurs when the price increases and Stochastic decreases or remains at the same level.
In the case cited above, we can also see a reliable fulfillment of the forecast resulting from downward divergence. The upward movement has been corrected.
Indicator 3 Stoch
After a short introduction on the stochastic oscillator, we will proceed to the presentation of the 3 Stoch indicator. 3 Stoch is an indicator created by superimposing 3 stochas with settings 5.3.3 / 20.10, 20.20 / 50.10, 20. This tool shows us on the selected TF trends from the current 5,3,3 time frames and higher time frames 50 and 20. In a moment I will present the meaning of each of the individual settings.
Let's start with an average of 5.3.3 (red / green), which will help us determine when to enter positions.
The average 20 is the% K line which changes from dark blue to light blue when cut from the invisible D% average from above and vice versa.
Dark blue promises us potential increases, and light blue decreases, so it's worth confirming the potential input resulting from the intersection of average 5.
The next line generated by the 3 stoch indicator is the average% K 50, which changes color from dark green to light green after cutting the invisible average D% from above. Dark green promises us potential increases, and light green decreases, similar to the blue line.
Ways to play positions using 3stoch:
It is good to start the analysis from higher time frames. At weekly (1W) we are looking for a signal where the current average is 3 Stoch. We check whether they are bought out - above level 70/80 - or sold out - below level 30/20. We perform the same procedure on a 1-day, 4-hour and 1-hour chart.
If 3 hours for 1 hour or 15 minutes shows us a signal consistent with higher times, then it can be a good moment for us to enter the position. Sometimes the above settings allow you to catch all the traffic, but because 3 Stoch works on historical data it usually allows us to catch a lot of traffic.
It's good to know that the 20 values on a 1 hour chart are close to the average value of 5 on a 4 hours chart, and the value 50 should be close to the average value of 5 on a 9 hour chart. Therefore, you can observe trends from different TFs from one chart level, which implies different possibilities.
3stoch can be used to perform local corrections in big movement, which will be presented on the GBPCHF, 4H chart.
The intersection of the blue average with the green one suggests that there may be a correction in the near future, additionally it is promising that the green one is above 80, which means the purchased level. However, it is worth waiting with the sale until the average green reaches extreme. This occurs on May 5 at 23 - the green average "flattens", which may suggest an imminent change of direction, additionally the average of 5 (green-red) has exceeded 80 and a downward intersection is potentially possible. Here we open a sales order to catch a long-term correction. The tactic assumes exiting local traffic corrections, so we will suggest intersections of average 5, the remaining averages will be used to assess whether long-term traffic is coming to an end. Every time we open a long position in this case, i.e. in a clear downward trend (determined by the blue and green average), SL should be set tightly and switch to BE quickly, in case the fall correction should be only temporary.
A thick red vertical line indicates the place where this downward trend begins to be played, while the thick green marks its end and closing position. Thin lines mark the potential places of opening and closing positions, which are designed to catch the correction of heavy traffic. Of course, it would be safe to play this move without the aforementioned stops or to secure the open position on May 5 in marked places. May 16, in a place where green turns dark green, you can safely close the short. As you can see, the chart went further down, but according to the strategy resulting from the use of 3stoch there are no grounds to keep this position, because all averages are very low in the sell-out zone.
Below is the source code by Pawtar, which is created for the tradingview.com platform, as well as you can find it in the indicators by entering 3 Stoch_K_close.
study (title = "3 Stoch") length1 = input (5, minval = 1), smoothK1 = input (3, minval = 1), smoothD1 = input (3, minval = 1) length2 = input (10, minval = 1), smoothK2 = input (20, minval = 1), smoothD2 = input (10, minval = 1) length3 = input (50, minval = 1), smoothK3 = input (20, minval = 1), smoothD3 = input (10, minval = 1) k1 = sma (stoch (close, close, close, length1), smoothK1) d1 = sma (k1, smoothD1)
col1 = k1> d1? green: red gossip1 = plot (k1, color = col1, transp = 0, linewidth = 1) plotd1 = plot (d1, color = col1, transp = 0, linewidth = 1) fill (gossip1, plotd1, color = col1, transp = 70)
k2 = sma (stoch (close, close, close, length2), smoothK2) d2 = sma (k2, smoothD2) col2 = k2> d2? blue: aqua plotk2 = plot (k2, color = col2, transp = 0, linewidth = 2)
k3 = sma (stoch (close, close, close, length3), smoothK3) d3 = sma (k3, smoothD3) col3 = k3> d3? green: lime plotk3 = plot (k3, color = col3, transp = 0, linewidth = 2)
band80 = hline (80, title = "Upper Line", linestyle = dashed, linewidth = 1, color = black) band20 = hline (20, title = "Lower Line", linestyle = dashed, linewidth = 1, color = black) band50 = hline (50, title = "Mid Line", linestyle = dashed, linewidth = 1, color = black)