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Revisiting an Old Profitable Trading Strategy
Presenting an Old Personal Trading Strategy
Old trading strategies, usually the ones we start with always have a special place in our memories. This article presents one of the earliest strategies I have used to follow the trend in a purely technical way.
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The Details of the Strategy
The strategy is purely technical and uses a few technical indicators and tools to deliver signals and targets. The components of the strategy are as follows:
A 14-period stochastic oscillator.
A 5-period stochastic oscillator.
A 200-period moving average.
A Fibonacci projection tool (for target setting).
The stochastic oscillator is a popular technical analysis tool used by traders and investors to measure the momentum and strength of a financial instrument’s price movements. It was developed by George C. Lane in the late 1950s. It is bounded between 0 and 100 with values close to the lower boundary being referred to as oversold levels (bullish bias) and values close to the upper boundary being referred to as overbought levels (bearish bias).
A moving average is a commonly used statistical calculation that helps smooth out price data over a specified period of time. It is widely used in various fields, including finance, economics, and signal processing. In the context of financial markets, moving averages are frequently employed in technical analysis to identify trends and generate trading signals.
A moving average is calculated by taking the average (mean) of a set of prices over a given time frame and updating it as new data becomes available. As each new data point is added, the oldest data point is dropped, resulting in a “moving” average that reflects the most recent prices.
Implementing the Strategy
The trading rules of the strategy are as follows:
A long signal is generated whenever both stochastic oscillator reach the oversold level at the same time, bounce, and then come back to it (around the same time). The whole process must be done while the market is above the 200-period moving average. The first target is set using the Fibonacci projection tool applied from the low of the first time the stochastic oscillators reached their bottom and the low of the second time they reached their bottom. The first target is therefore the 61.8% projection and the second target is the 100.0% projection.
A short signal is generated whenever both stochastic oscillator reach the overbought level at the same time, bounce, and then come back to it (around the same time). The whole process must be done while the market is below the 200-period moving average. The first target is set using the Fibonacci projection tool applied from the high of the first time the stochastic oscillators reached their top and the high of the second time they reached their top. The first target is therefore the 61.8% projection and the second target is the 100.0% projection.
The following Figure shows a bullish signal:
The following Figure shows a bearish signal:
Ultimately, the results may vary from market to market and the current results may not be stable. Strategies work during certain periods but may underperform during others.
The stop of the strategy is either half the target so that a 2.0 risk-reward ratio is achieved or whenever the market breaks the moving average line.