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As we will see later on there are numerous ways in which SI may be used. It is the purpose of this chapter to provide you with what I feel are some of the most powerful methods for day traders.

I am confident that those who understand and consistently apply the principles we are about to teach will appreciate both the simplicity and power of our techniques. Before introducing the basic approaches to SI timing I'd like to stress the following important aspects of stochastics:

1. Many traders consider an SI of 75 percent or higher as an indication that a top is imminent, and a stochastic of 25 percent or lower is often considered an imminent sign of a bottom.

2. The fact that the SI reaches an overbought condition (i.e., 75 percent or higher) or an oversold condition (25 percent or lower) does not necessarily indicate that action should be taken immediately. This is the single most severe drawback of traditional stochastic implementation.

3. The SI is used by many traders as a stand-alone system. Although there is nothing wrong with this approach, I have found that with only a few exceptions the addition of time indication overall results, regardless of which SI technique you are using. Basic Approaches to SI Timing.

Percent K and Percent D Crossover Signals The SI (stochastic indicator) can be used in either its fast or slow mode. The slow SI mode is a moving average version of the fast SI mode. We recommend using slow_% since fast SI oscillates too wildly.

One method of SI timing is to use the slow SI for buy and sell signals on crossovers of the percent K and percent D SI lines. This approach is illustrated in Figure 5-1. This application of SI requires a considerable amount of trading, trading which varies directly with the length of the SI indicator. Shorter lengths of SI result in more trades and vice versa.

This technique is subject to the same limitations found in virtually all moving average and oscillator applications-it generates numerous false signals and tends to give back too much in profits.

2. 25 Percent and 75 Percent SI Crossovers Generally speaking an SI reading of 75 percent or higher is considered overbought and a reading of 25 percent or lower is considered oversold.

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