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Speaking of the stochastic specifically:
A few weeks ago I asked about the same issue in a different manner. I asked
about how one could distinguish (or test) between stochastic
breakouts/breakdowns that were tradeable vs. untradeable for profit. The
only answer I remember getting back was that price itself was the
confirmation. This makes sense and can be useful I think.
The only problem is that sometimes you get a stochastic breakout/breakdown
with an accompanying movement in price only to find later that it doesn't
get you very far. (I think this is the point you're making Rick.) That's
why I, and I believe many others, have found the stochastic to be alluring
yet in the end disappointing.
But if you look carefully at the S&P500 chart I sent out earlier today,
you'll see that there is another potential confirmation indicator for a
stochastic breakout/breakdown in the topmost indicator section shown in the
2nd indicator section. Follow each stochastic breakout/breakdown in the
topmost indicator section, compare to price value and direction, and then to
the stochastic value and direction in the 2nd indicator section. If I'm not
mistaken, the stochastic value and direction shown in indicator section 2
would have been an incredibly accurate indicator for assessing the "quality"
of the stochastic breakout/breakdown in indicator section 1.
I could have sent hundreds of charts of varying multi-periods that
illustrate the same thing. If I seem to have been foaming at the mouth
about this, it's because I have found hundreds of examples of this. I'm NOT
saying it provides 100% confirmation. I am saying that the kinds of
relationships you see in that graphic are the standard ways these
relationships work not the exceptional ways.
So, Rick, I disagree that testing the stochastic specifically over
historical data is problematic because of what we might call price/value
differences among lookback periods for the same kind of oscillator
breakout/breakdown signal. The problem is that we haven't had the "concept"
or the software to test indicators at multiple periods within the same test.
Steven Buss
Walnut Creek, CA
sbuss@xxxxxxxxxxx
-----Original Message-----
From: Rick Mortellra <rmjapan@xxxxxxxxxxxxx>
To: MetaStock List <metastock-list@xxxxxxxxxxxxx>
Date: Monday, January 19, 1998 10:58 PM
Subject: Stochastic brain teaser
>In consideration of Steve's market plunging on the stochastic trigger, I
>though I might put this brain teaser out and shake Steve's confidence in
his
>system a little ;-)
>
>A weakness in system testing the stochastic (or practically any momentum
>indicator) over historical data is that what constitutes OVERBOUGHT or
>OVERSOLD are relative, i.e. it depends on the recent past as defined by the
>number of bars in the look-back period and different existing market
>conditions. Thus OVERBOUGHT or OVERSOLD values today may not have been last
>year. Means though the signals generated now may be valid for trading,
>testing a system historically will generate invalid results.
>
>One way to overcome this is to substitute statistical measures of trend in
>momentum formulas. Then, OVERBOUGHT or OVERSOLD values can confidently be
>calculated at 2 standard deviations from the mean.
>
>Sounds simple, but of course the devil is in the details.
>
>Working hard to solve this one,
>Rick
>
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