Exploring The Best Stochastic Settings For a 1 Minute Chart

Do not believe in anything simply because you have heard it. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it.

Gautama Buddha

Today I was asked a question that made me numb for a minute. 

What are the best stochastic settings for a 1 minute chart?

About 10 years ago my rolled eyes would have been an answer. Who in the world could now, in 2023, believe in making money trading 1-minute charts armed solely with a Stochastic indicator?

Yet, the more I explore the markets, the less arrogance I have left in relation to any ideas that pop out colleagues’ minds. You never know… until you get the facts. 

Back in the late 90’s when I was a kid, up to 10 million people of the post-soviet countries had lost their money to one of the world’s largest Ponzi schemes called MMM. In Ukraine, where I come from, it was also unbelievably popular. 

That Ponzi scheme surprised me twice. The first time was in 1997, when this financial pyramid collapsed. I remember well the disappointment and panic that many families who have invested their last savings in worthless “stocks” experienced. I was just a naive 13 years old teenager myself back then but I remember well how surprised I was that so many people could be trapped with such ridiculous promises of above 3000% yearly returns.

Many years later I met really rich people. After having a bottle of wine they shared their story of success. It turned out the initial capital they started their large business with was made exactly with that MMM HYIP. Their secret was timing. Being among the first in and not the last out they managed to multiply their modest initial investments and, most importantly, preserve a large portion of the raised capital. This was the second time this MMM story impressed me. I never thought there was anyone really making money with it apart from co-founders. That was an eye-opening experience.

I certainly do not recommend anyone investing in HYIPs. My point is that it’s pretty arrogant to say something can’t happen in the world of finance simply because you have never met the beneficiary of the idea.

I offer you to explore reality as it is with me. The initial question I’ve heard was “What are the best Stochastic settings for a one-minute chart?”. I offer to make it a bit more practical. After all there is a reason why people ask questions. 

What if we put it this way: what profits can we expect using optimal Stochastic settings for a one-minute chart strategy?

To answer this one we will need to discuss some basics first.

How are Stochastic settings for a one-minute chart different from other timeframes’ settings?

Financial analysts are sleeky. They will give you a Stochastic formula, tell what each setting does, and remind you that it all depends. They will never give you exact numbers. Yet, numbers are the only thing that really interests traders, who ask for the best settings for a Stochastic oscillator.

I am a practical trader, not really an analyst. I am interested in finding the real answer for the asked question. 

It’s true that the best Stochastic settings will depend on the trading idea, market conditions, and the asset you trade. Yet, I have some serious doubts that the timeframe you trade should really be taken into account when searching for best Stochastic settings. We will have to dive a bit into the theory to explain why. I promise to keep it very simple. 

What does Stochastic oscillator do? 

This indicator measures how the current price is different from what’s been observed in the recent past on the chart. It identifies the overbought and oversold conditions based on what’s been “normal” recently.

Stochastic is typically represented by two lines, with values ranging from 0 to 100. Generally, a zone below 20 is considered oversold, while values above 80 signal that an asset is in the overbought zone.

What do Stochastic settings do? 

The %K line in the Stochastic Oscillator is known as the fast line. It represents the current position of the closing price of an asset relative to the recent price range. When the %K line is high, it means the current price is close to the highest price observed over a recent period.

%K setting determines the number of periods that are used to calculate this faster %K line. Period is not a specific time value. It’s rather the number of bars/candles that the oscillator’s formula will use when plotting the %K line. 

The %D line is a moving average of the %K line. In other words, it’s a smoother version of the %K line.

%D setting determines a number of periods used for this moving average. When you have a smaller %D period, like 3, it makes the line stick closely to the %K line. 

The third setting is called either smoothing or slowing, depending on the trading platform you use. It serves to smooth the curve of the Stochastic lines. Similar to the previous setting, the higher the value you set here, the less market noise you will observe on the oscillator. However, in this case, Stochastic values may lag behind the current market conditions.

As you can see, Stochastic settings will only impact how sensitive the indicator will be and how slower the %D line of Stochastic can get, compared to the %K. The effect of changed settings will be the same on any timeframe of your choice.

What comes first: Stochastic settings or a strategy?

There are many ways to use Stochastic oscillator’s values when trading. The settings will definitely depend on the planned application of this instrument.

Once we know what Stochastic can reveal about the current price, this is possible to find the ways to use it with the benefit for our deposit. 

Some prefer ignoring the correlation between the two lines of Stochastic and simply wait for both oscillator’s lines to reach the overbought or oversold levels to place the order. Others find much more complex ways to interpret indicator’s values.

My opinion is that you may interpret Stochastic in any way as long as this way is profitable for you. If you can make money each time you see the shape of a kitten plotted by oscillator’s lines – go ahead, how am I to judge you?

The only thing I know for sure is that the chance to see cat’s ears sticking behind Stochastic values will depend on the settings you apply. The effectiveness of a strategy may also depend on the settings. Jokes aside, for each particular Stochastic-based strategy indicator’s settings will affect the number of trades you can get and the expected average per trade.

Where can we get the facts about Stochastic settings’ effectiveness?

By this time I hope we’ve agreed already that: 

1. Stochastic settings perform pretty much the same on any timeframe.
2. Stochastic settings must be adjusted with regard to the trading strategy you plan to implement.  

One minor thing left to find out is where do we get the facts that will prove the effectiveness of certain Stochastic settings applied to your strategy. That’s an easy one. 

The only way to find out what are the best settings for Stochastic for a 1-minute chart as well as finding out the level of effectiveness of any trading idea is to put this idea into action and see the result.

If you don’t want to stake your money on rough ideas, you can either demo-trade them, or backtest. 

Backtesting is undoubtedly my preferred choice. It allows for testing ideas in accelerated mode, saving both time and providing more precise results compared to demo-trading. With demo-trading, it’s all too easy to become distracted, potentially missing signals or deviating from the initial strategic plan.

In contrast, backtesting provides a different experience. It allows you to focus on a single idea and pause the market when you’re not feeling at your best. It enables you to explore a larger volume of market data within a shorter timeframe, rewind the chart if you spot a missed opportunity, and, ultimately, obtain more reliable results.

Last but not least, backtesting tools also provide the opportunity to identify the strengths and weaknesses of the trading system you’re testing, opening the door to valuable optimization possibilities.

I recommend you using Forex Tester Online for backtesting. There you can access 21+ years of tick historical data for Forex, crypto, stocks, and more. With advanced features, such as custom indicators, mystery mode, and scenarios, you can test any strategy and gain skills without risking real money.

Let me show you how it works. 

Backtesting to find the best settings for Stochastic based strategy 

In order to get reliable results from a backtest  we need to determine the rules of a strategy we’re gonna apply on the market with the highest degree of precision. The asset we will trade, timeframe, signals for entry, stop loss and take profit – all that must be clear from the beginning.

Depending on the results of first iterations of backtesting these rules may change later. However this is critically important to make every step very clear so that anyone applying the same strategy in the future can count on similar results. 

Determining the rules for Stochastic based strategy  

To illustrate the process of backtesting I suggest taking one of the well-known Stochastic based strategy ANTI.

ANTI strategy was first described by Linda Raschke in her book Street Smarts: High Probability Short-Term Trading Strategies. I don’t know if there is a point introducing Linda Raschke. This amazing woman is the founder of LBR Asset Management and the author of several bestsellers where she described some strategies that have proven their consistent profitability over decades.

I suggest backtesting the ANTI strategy because the rules here are based solely on Stochastic values, they are clear, and the author herself provides the best Stochastic settings to trade it. Linda has done enough experiments herself to find the optimal settings so this can be a good starting point.

The cornerstone of the ANTI strategy is the assumption that the short term trend tends to reverse in the erection of the longer-term trend. 

Sounds reasonable. 

The best Stochastic setting to trade on a 1-minute timefreme, 1-hour timeframe or dailies are all the same, even though Linda preferred trading dailies herself. 

ANTI suggests to apply the following Stochastic settings: 

%K = 7

 %D = 10 

Slowing = 4 

The BUY signal is the following:

1. Slower %D line is gradually going up. 
2. Faster %K line was above the %D line, but crossed it moving down. Then it again gets pulled back to the %D line, forming a kind of a hook.

That’s it. Once the hook is formed, we should place a market buy order with a stop-loss order beneath the local minimum. 

The SELL signal is exactly the opposite:

1. Slower %D line is gradually going down. 
2. Faster %K line was below the %D line, but crossed it moving up. Then it again gets pulled back to the %D line, forming an upside-down hook.

Mrs. Raschke suggests some more details and ways to trade the ANTI strategy in her book but in general the rules are this simple. Exactly what we need to give our backtesting a good start! 

The asset we choose to trade must be liquid enough. As long as we plan testing the best Stochastic settings for 1-minute chart, the size of the spread will also matter. You can’t expect enormous profits using signals from 1-minute chart and we definitely don’t want the spread to be larger than expected return on account. 

GBP/USD chart for our analysis will work, I guess. 

One last thing to determine for our trading rules is where to place a take profit order. As long as the strategy does not assume long-term deals, considering that our stop loss will vary a bit depending on where the local highs and lows will be, I suggest using a modest 1:2 risk reward ratio. We will simply double our stop loss pip-value for placing a take profit order.  

In case we get a new signal before the previous trade gets closed with stop loss or take profit, we will follow this new signal, closing the previous one as well. 

Doing the first backtest of ANTI strategy with standard Stochastic settings on a 1-minute chart

For backtesting I will use ForexTester Online. This tool allows working with the reliable market data in an offline mode. You can apply your broker’s spread for adding more precision to your backtesting results but I will go with standard settings for now. The standard spread for GBP/USD is 1.4 pips.

I suggest taking 30 trades for the beginning and see if our default settings for Stochastic based strategy are any good on a 1-minute chart.

The results turned out to be a little better than I could have expected. $284 net profit. 14 winning trades out of 30 is also not so bad, considering our risk to reward ratio is 1:2. 

It took me about 20 minutes to get these 30 trades for my statistics in backtesting mode. In demo-trading mode that would have taken 20 hours. 

I think it’s time to review the first results and see where we can go on from this point. 

After 20 minutes of active backtesting I see several weak spots in the ANTI strategy.

1. Inexperienced traders may find it rather difficult to identify the desired hook formation on a Stochastic oscillator on a 1-minute chart. The doubts may arise about %D line. The rules say it must be going up or down gradually. What does “gradually” really mean? What if it starts turning a little bit when the hook of %K line gets formed? 

Is it going down gradually enough here?  

What about this kind of slope? 

ANTI strategy may provide slightly different results depending how your eye identifies this hook formation. I’ve spent my 10 000 hours working with charts so I may be confident enough that my hand-trading style is pretty reliable, but if you feel like you need more practice – do not hesitate to take your time and train yourself to identify graphic formations on the charts. Once again, demo-trading or backtesting instruments such as Forex Tester Online can help you with this. 

1. The largest winning and losing trades are the same in my modest sample of 30 trades. They both equal $190. Considering that the total net profit is not that huge, one may want to cut on the trades that assume a much larger than average stop loss. Another backtest may be required to check this hypothesis. 
2. Our average per trade here is less than 10 bucks, while trading cost for each trade is $14. The spread is included in our backtesting results, yet, it swallows a large portion of our expected income. If your inner hog is as strong as mine, you would want to change this situation. Switching to the upper timeframes is the most reasonable solution I see for this kind of trouble.

If you wish, you can try fixing the first second problem yourself. Simply run a similar to the above backtest but do not enter any trades that assume a larger than average stop loss. I’d rather focus on the third issue. 

Optimizing the results of a Stochastic based strategy 

I believe we got very close to the answer to the initial question now. What profits can we expect using optimal Stochastic settings for a one-minute chart strategy? 

The answer is: SMALL. The expected profits are very small. Even if you take a nice strategy and apply advised Stochastic settings, trading costs will not let you make much money by taking the opportunities that a 1-minute chart can offer you.

Though, I believe that our small research can’t be complete without finding little more specifics about the simplest way to increase the expected profits with the ANTI strategy based on Stochastic oscillator values.

There is an unbelievably long list of optimization efforts we could apply to this strategy. We could try playing with Stochastic settings, mind the zone where the desired %K line hook gets formed, exit the market at the time of major news releases, try trading other assets etc. However, the easiest thing we can do is simply switch the timeframe to the upper one.

Here are the results of 30 other trades using the same ANTI strategy with exactly the same rules but backtested on H1, as opposed to 1-minute chart backtesting that we’ve done before. 

$75.43 per trade! That’s much better compared to ten bucks that we’ve managed to squeeze out of 1-minute charts! That gives some hope that Linda Raschke’s suggestion of the best Stochastic settings is not senseless at all when applied to her ANTI strategy. 

The bottom line

I’m pretty sure we’ve spotted nice if not the best Stochastic settings to trade forex assets in this little research. Yet, there is a lot more field work to do with backtesting before we could start trading ANTI with live money.

Firstly, I’d suggest increasing the sample of trades. 30 trades is my personal minimum that I use to do an initial crash test of some market idea. Such a sample is not reliable enough. Several hundred trades that you’ve done yourself will do a much better job with providing reliable historical results.

Secondly, ANTI strategy is one of those strategies that are rather difficult to formalize with a 100% precision. Each trader may recognize such graphic patterns on an oscillator a little bit differently. That shouldn’t be a problem if there really is a very small bit of variability. However, you need to examine this issue applied to your individual trading style. I’d suggest backtesting the same chart twice or even more times with this strategy and see if your hand-trading results differ too much or not. 

Thirdly, you really need an advanced instrument to backtest this strategy properly. The issue is that the ANTI strategy assumes you watch Stochastic oscillator real-time. You shouldn’t wait for the close of the candle to enter the trade. This means you can’t simply do bar-by-bar research for it. You will need the tick market data to backtest ANTI strategy objectively. Forex Tester Online allows backtesting with tick data so I can rely on the results we’ve got today.

I know that offering to do some more work with backtesting the historical market data may sound a little disappointing. When people ask for the best settings for Stochastic for 1-minute charts they really expect someone to give them exact numbers that will miraculously help them generate profits with any strategy applied. Good luck with that! 

For those who have heard the voice of the reason and are ready to do some homework – my hat is off to you. You don’t need any luck, just a little bit of patience. That’s a much safer path to take when exploring financial markets.