Stochastic Commodity System

This tutorial should be called: Combining Stochastics with other Indicators, but Stochastic Commodity System sounds real nice.

Stochastic Oscillator technical indicator can be combined with other indicators to form a commodity system. For our example we will combine it with:

• RSI
• MACD
• Moving Averages Trading Technical Indicator

Example 1: Commodity Trading Stochastic System

Sell Trading Signal Generated using Commodity Trading Stochastic Trading System

From our commodity system the sell trade signal is generated when:

1. Both Moving Averages are moving down
2. RSI is below 50
3. Stochastic moving downward
4. MACD moving downward below center-line

The sell signal was generated when all these commodity rules were met. The exit signal is generated when a signal in opposite direction is generated i.e. When the indicators reverse.

Good thing about using such a commodity system is that we are using different types of indicators to confirm the trade signals and avoid as many whipsaws as possible in the process.

• Stochastic - is a momentum oscillator commodities technical indicator
• RSI- is a momentum oscillator commodities technical indicator
• Moving Averages Commodities Trading Technical Indicator- is a trend following commodities technical indicator
• MACD- is a trend following commodities technical indicator

It is very useful to combine more than one indicator, as a combination of signals is better than relying on just a single indicator. The technical trading indicator combinations reinforce each other, and cancel out false whipsaw trade signals.

A trend following technical indicator helps a trader to see the overall picture, while using more than one momentum technical indicator gives better & more reliable entry & exit points for trading commodity.

The indicators combinations & their signals help to decipher a lot of the market activity.

Example 2: Commodity Trading Stochastic Trading System

Buy Commodity Trading Signal Generated using Commodity Trading Stochastic System

For this example the trend is clearly upwards, but at some point there were a few commodity whipsaws generated by the stochastic oscillator indicator, can i spot them? So the question is how can one avoid trading these commodity whipsaws?

Well, the answer is that by looking at the other technical indicators such as MACD indicator a trader could have avoided the whipsaw, even the MACD technical indicator had not given a crossover trading signal although it was very close to the zero center line level, at the same time the gradient at which the moving averages technical indicators turned was not so sharp as to warrant a decisive market trend reversal. Well the thing is that it's not so obvious when it comes to recognizing market whipsaws: it is a skill that takes some time but after some time you can spot whipsaws from a mile away.

One tip is that as long as MACD indicator is above zero center-line even if the MACD lines are heading downwards then the trend is still upwards. As you can see from the above example MACD indicator never went below zero line and afterwards the upward trend continued with the MACD indicator maintaining above Zero line and continuing to move upwards.

During ranging markets Stochastic Oscillator indicator will give the fastest signals which are prone to whipsaws. This is why stochastic oscillator is best combined with other indicators & the signals traded are confirmed by another one or two other Commodities indicators.