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Intraday Stochastic Pop: Definition

Intraday Stochastic Pop: Definition

I've been asked on many occasions why I call my unique use of stochasВэtics the "stochastic pop" indicator (referred to hereinafter as SP). Very simply, the SP is so termed because it enters markets when most traders consider markets to be overbought or oversold. In other words, the SP signals a buy when a market is considered by the vast majority of traders to be overbought and incapable of going any higher. SP enters short positions when the majority of traders considers the market to be oversold and unlikely to go any lower. In other words, I have found that markets tend to POP like a. kernel of corn at the right temperature, once they reach certain levels on the SI.

Through the years I have found that the ideas of overbought and oversold are fallacies. The fact is that a market is never too overbought to go higher and hardly ever too oversold to go lower. Since there is a natural limit as to how low prices can go (i.e., zero), there does eventually come a point at which prices are ideally too low and oversold. On the upside, however, as we have seen many times over the last 25 years, there is no limit to how high prices can go. Therefore, the SP method takes advanВэtage of market momentum by buying when momentum is strong and selling when momentum is weak in the expectation that the move will continue long enough to yield a profit.

In other words, SP is, in a sense, consistent with the laws of physics which state that a body in motion tends to stay in motion until it runs out of energy. In studying the stock and futures markets I have found that many very large moves occur quickly toward the end of a bullish trend and toward the end of a bearish trend. Frequently, the period of greatest upside momentum over the shortest period of time occurs after a market has become overbought and after a market has become overВэsold. SP attempts to capitalize on this condition.

SP Parameters

Here are the rules of application for SP. Using a 14-period slow stochasВэtic indicator, a buy signal will be triggered when percent K is at 75 perВэcent or higher at the end of the period you are using. For the purpose of day trading with the SP, I prefer either 5- or 10-minute data. ConВэsequently, once the SI has closed at 75 percent or higher on percent K using 5- or 10-minute data, you will be buying immediately upon that 5-or 10-minute posting. Your buy will always be at the market. From time to time there may be sufficient leeway to allow a specific price order; however, I leave that type of jockeying up to you, since it is not usually a simple matter. Once you have established your position, use either a risk management stop loss or exit your position at the market as soon as perВэcent K and percent D have crossed one another at the end of your 5- or 10-minute segment.

See Figures 5-4, 5-5, and 5-6 for graphic explanations and illustrations of the SP method. Note that the following abbreviations are used on many of the charts in this chapter as well as in the chapters which follow:

B = buy to establish new long position S = sell to establish new short position SL = close out long position and go flat CS = cover short position and go flat F = forced out at end of day

As you can see from a close examination of these illustrations, in every case that there was a buy or a sell SP signal, the results would have been profitable even after having been stopped out on the exit sigВэnal. Remember that once the exit signal has occurred you must exit your position at the market.

Assume now that once you have entered by SP and exited according to the rules, percent K declines under 75 percent and then in a future at the end of a subsequent 5- or 10-minute segment goes to 75 percent or higher. What to do? Simply enter a long position again and trade by the rules. You will find a number of such instances illustrated in Figures 5-7 and 5-8.

Although the SP technique is ultimately very simple, it does require close attention, and you must, by all means, be there watching for those crossovers or you will lose money with this method. Before you attempt to implement this approach, take the time to follow it closely in actual market conditions so that you may test your knowledge and develop your skill with the SP method.

As you can see from the illustrations, the SP sell condition on an intraВэday basis also uses 5- or 10-minute data; however, it sells once percent K falls below 25 percent after first having been above it. Price execution is at the market in all cases, although as I've said earlier, you may decide to fool with specific price orders on your own if you'd like to take the chance. Exit of the SP sell will be at the market once percent K and perВэcent D have crossed.

In any event, do remember that the SP intraday method is merely a day-trading method. I recommended against carrying positions beyond the end of the trading session. You must be out of your SP trade by the end of the day in order for it to qualify as a true day trade.