Filtering Stochastic Signals with Price Averages and Step Changes
Summary
This indicator variation aims to reduce false or excessive signals from a stochastic oscillator. It applies a step chart filter to the calculated stochastic: a user-set step size determines the minimum change treated as significant, and changes in the step bar’s color can be used as signals. The document also describes optional price smoothing before the stochastic calculation, using simple, exponential, smoothed, or linear weighted moving averages. Together, these stages let users filter the input prices and then filter the oscillator output.
The explanation gives no backtest, market examples, or performance evidence, and it does not define entry, exit, or risk rules. The approach is presented as a way to make signals easier to use and potentially reduce false signals, but effectiveness depends on the chosen settings and market conditions. It should be treated as an indicator design description rather than evidence of a profitable trading strategy.
Key ideas
- A step chart can filter stochastic readings by ignoring changes smaller than a user-selected threshold.
- The indicator can smooth prices with one of four moving average types before calculating stochastic.
- Price smoothing and the step filter create two successive filtering stages.
- Color changes in the step bar are proposed as signals, without specified trade or risk rules.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.