Stochastic trading strategy backtested [positive results]

Stochastic trading strategy: can 1 indicator be a solution?

Till now we have tried various indicators in pairs and combinations.

However, can the indicator stand alone and still be enough for the prediction of the next movements of the market?

This time we put Stochastic Indicator all alone to the test. Read further and learn how it turned to be – profitable or not.

It should be one of the simplest strategies ever, but can it leave the trader with profits?

Let’s check together.

A Couple of Words About Indicators

Stochastic Oscilllator consists of two lines – two averages moving between 0 and 100 levels.


There are two levels important for the Stochastic Oscillator – Overbought and Oversold levels – those are the extreme periods.

The level over 80 line is called “Overbought” level, while the level below the 20 line is called “Oversold” level.


The cross of the two lines of Stochastic within those periods, provide a trade a signal to buy/sell.

That is the kind of the signal we are going use while trading this Stochastic Oscillator strategy.

Technical Information

Timeframe: 15 mins and above (we backtest within the 30 mins timeframe).

Currency pair: any.

Indicators: Stochastic Oscillator (with default settings).

Buy Rules:

  1. Two Stochastic lines cross at the oversold level, they cross the 20 line.
  2. The Bullish should form.
  3. Place your Stop Loss 2-5 pips below the low of that candlestick.
  4. Take profit should be 3 times more that Stop Loss or place it over the closest swing high.

Sell Rules:

  1. Two lines of Stochastic cross at the overbought level, they cross the 80 line.
  2. The Bearish candlestick should form.
  3. Place you stop loss 2-5 pips above the high of that candlestick.
  4. Take profit should be 3 times bigger than the Stop Loss or place it below the closest swing low.

Backtesting Results

Market Training set Forward testing
Bull 68,46 pips 37,2 pips
Bear 101,65 pips 19,98 pips
Flat 102,37 pips -14,2 pips

Trades|Period*

Market Training set Forward testing
Bull 01/03/2011-18/03/2011 09/06/2010 – 12/07/2010
Bear 01/01/15-20/01/2015 01/09/2014-09/09/2014
Flat 01/09/2016 – 22/09/2016 04/05/2015 – 12/05/2015

*How long it took us to enter the 50 trades for the Training Set and 20 trades for the Forward Testing.


A Reminder: in order to save your valuable time and efforts, we have introduced the system of backtesting when you perform only 50 trades through 3 different types of market (Bullish, Bearish and Flat markets) and then again 20 trades through the given types of market, but during other periods.

Then with simple math calculations, we can make conclusions about effectiveness or irrelevance of the chosen strategy.


The full version of the theory of our backtesting experiments and how did we came up with the idea of such backtesting you can read here.

Conclusions

Traditionally we remind you that we do not claim any trading idea/plan/strategy to be an epic fail or the Holy Grail. Within the GIVEN settings the strategy has showed the listed results.

Even the slight changes of the settings can result into unexpected outcome of the trading session.


The first amazing thing to mention is that it took us less than a month to perform the needed quantity of trades.

Therefore, the profits gained during some of the periods can be named more or less tangible.


What was the performance of the strategy in general?

During the Bull market, the profit wasn’t huge in the Training set, but it was confirmed during the Forward testing.

During the Bear and Flat markets, the performance was totally the opposite:

While bringing profits within the Training set, it appeared to be a loss within the forward testing.

What should that mean?

First of all, that you cannot rely on blind faith in ‘winning strategies’ unless you backtest them through different environment and with various settings.

Check below how else you can adjust this strategy and make sure you try all the variants and find the one suitable for you.

Further Adjustments for Better Results

There are not so many options compared to the backtesting experiments listed before.

However, there are still some ways you can try different settings:

  • You can try to increase/decline the Stop Loss and Take Profit numbers – so you won’t risk too much or get out of the trade too early;
  • You can try different timeframes and currency pairs;
  • Not without reason traders prefer to use two or three indicators in a row – they can complement each other, or one can measure trendness while another one pick the entry points. You can try two indicators or you can aim even for three;
  • Feel free to verify three trade set ups by the endless combination of the indicators, figures, candlestick patterns etc.

Try It Yourself

As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.

The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program.

To check this (or any other) strategy’s performance you can download Forex Tester 3 for free.

In addition, you will receive 17 years of free historical data (easily downloadable straight from the software).


What is your favorite indicator?
MACD
Stochastic
Ichimoku
RSI
Moving Average
Heiken Ashi
Renko bars
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