Stochastics Steps (StStep)

Philosophy

This study records the closing value of a bar when the Stochastic %K crosses up or down through the Stochastic %D. This enables the ability to redefine divergence by allowing flexibility in the established mantras associated with the subject and also qualify the strength of the trend and what the highest timeframe chart is trending. This means that the trader knows what timeframe chart should be dominating there core technical based signals.

Therefore Stochastic Step does three things. Identifies trends, is the basis of qualifying divergence and dictates the timeframe chart to be analyzed. See chapter 3 and 4 of the book Trading Time for an expanded philosophy statement.

In order to understand and qualify both trend and divergence the studies should be applied two times. The first time records the closing value of the bar and by left clicking a second time and modifying the Value to Record to Base study.

The increased flexibility in understanding these points derives from the ability to select what price should be used to qualify. This means if for example the relationship of the close instead of high and lows is used, it reveals the ability to quantify divergence in sideways markets in order to produce and early warning to a break out and new trend. This is referenced as divergence as a continuation. This use of different momentum indicators and variables of them to create divergence enables the trader to define how aggressive or conservative they wish there signals to be.

Each momentum indicator used for divergence has different characteristics and therefore different trading opportunities. Slow Stochastic is a rather sensitive indicator in its original default setting on the StDiv study in that has a close correlation with the price action of the market itself, especially in its relationship to the close to the high or low of the bar.

Interpretation

The use of Steps can be interpreted for both the use as a divergence and trend qualifier.

For divergence, the steps up or down between the value of the bar and the indicator should be going in opposite directions. The aggressiveness of that divergence is the number of consecutive times this occurs. Aggressive is 2 times and conservative 3 times. It is very rare for markets to step in opposite direction 4 times, whatever the timeframe used, market or indicator. The qualifying of divergence is dictated by the direction that the steps are moving in e.g. when the moving average crosses up it is doing it at a higher level than the previous cross up (i.e. the study steps up), but the closing value of the bar on crossover of the moving average is lower than the closing value of the bar on the previous crossover (i.e. the study steps down). This would constitute positive divergence.

To indicate a trend qualifier the opposite is true. The steps up or down between the value of the bar and the indicator should be going in the same direction (i.e. both step up or down). This confirms that the indicator is showing more momentum by reaching a larger extreme and that the value within the trend is also continuing to a larger extreme.

One of the hardest tasks a trader confronts is how to understand what is the dominant time frame and therefore the one to be referencing. A second problem is the ability to ride a trend through to its conclusion from a short term trade to a long term if the analysis dictates that is what should be done. Steps qualify this process. The dominant timeframe is the highest timeframe chart that shows any step whether on the bar or the indicator that has stepped in the same direction on a consecutive basis on 4 occasions. As trends extend, they must step up timeframes in order to signal that the trend is continuing and maturing. Different asset classes can extend varying timeframes before the trend stalls. Majors on Fx will rarely go more than a half day chart, whereas cross rates can move to daily charts. Mean reverting markets such as Bonds will also rarely extend to historical charts. However, individual stocks and index’s can extend to weeks and even months which means trends that began as a short term trade on intraday charts are finally exited many years later. The appendix in Trading Time shows such an example of riding the Australian stock market rally from 2003 to 2007 and over 4000 pts, with began on a 30 minute chart and ended on a weekly. The use of both Peak Range and Peak Volume act as the trailing stop to such Step trades.

StStep Parameters