Trading Strategies Revealed – “Two Stochastics” review

“Two Stochastics” is a popular trading strategy that uses two Stochastic indicators and RSI filter to determine its entry points.

Two Stochastics” Settings

The strategy uses two Stochastic indicators: slow Stochastic with parameters %K period = 21, %D period = 9, Slowing = 9 and fast Stochastic with parameters %K period = 9, %D period = 3, Slowing = 3.

How to trade “Two Stochastics“?

A trader should use 3 indicators: slow Stochastic, fast Stochastic and RSI. A trader should open a long trade when both of Stochastics are in oversold zone (<20) and RSI shows oversold (<30) as well. A short position should be opened when both of Stochastics are in overbought zone (>80) and RSI shows overbought (>70) as well.

Initial back-test

To run a back-test we have coded a complete “Two Stochastics” trading strategy as a MetaTrader 4 Expert Advisor. During preliminary analysis we have identified that the best time frame for “Two Stochastics” trading strategy is 1 hour (H1). We have run a back-test of “Two Stochastics” strategy. For our test as a trade exit rule we have used a Trailing Stop of 30 pips which is launched after a trade has started and is modified each new 1 pip of profit. From our point of view, such approach allows to maximize profit and minimize drawdown.

We have run the test for 2009.01.01-2020.03.13 using Every Tick modelling on EURUSD-H1, using 1:4 leverage, without reinvestment, assuming spread equals 10 ticks. These are the main parameters of “Two Stochastics” trading strategy performance at its non-optimized state:

ROI# of tradesWinning ratioMax. drawdown
-7.31%102335.58%81.87%

Trading data analysis

After running the initial test of a simple non-filtered strategy we perform a trading data analysis that allows to identify possible filters to use to make the strategy more profitable reducing the drawdown simultaneously.

The following charts may give some possible insights on which filters to apply (time sessions, day of week limitation, trend strength threshold, overbought/oversold conditions, volatility range) to turn this strategy profitable should you decide to use this strategy in your investment portfolio:



Optimization

“Two Stochastics” trading strategy can be used with other indicators to filter out losing trades and make entry signals more accurate. After analysing trading data we have found the following insights which have helped us to increase the profitability of “Two Stochastics” trading strategy and reduce its drawdown:

  • Most Trades that were opened at a too low and too high value of ADX where losing when trading “Two Stochastics” trading strategy during 2009 – 2020. ADX shows the power of a trend and at lower and higher values, the trend is not stable.
    (ROI increase -7% -> 1.7%, Drawdown reduction 81% -> 16%)
  • The most profitable trades were opened at middle values of RVI when trading “Two Stochastics” trading strategy during 2009 – 2020. RVI measures the strength of a trend and it is unreasonable to take trades when trend is still not stable or when the current trend is at its final stage.
    (ROI increase -7% -> -0.5%, Drawdown reduction 81% -> 27%)
  • Trades that were opened at a boundary state of MACD brought more losses when trading “Two Stochastics” trading strategy during 2009 – 2020. MACD shows the power and direction of the current trend.
    (ROI increase -7% -> -5%, Drawdown reduction 81% -> 65%)

Optimization results

We have analysed data received from a test of Two Stochastics trading strategy during 2009 — 2020 years and applied some filters such as Stochastic, RVI and MACD. As a result, the profitability of the strategy has increased from -7.31% up to 3.77% and it’s drawdown has reduced from 64.29% to 11.60% using leverage 1:4.

Post-optimization back-test

Reducing the drawdown has allowed us to increase the leverage that can be used while trading this strategy up to 1:70, which in turn, has resulted in annualized ROI increase up to 66.05%!


ROI# of tradesWinning ratioMax. drawdown
72.35%37841.80%29.08%

Analyze your trading strategy!

If you decide to buy an EA, coded in accordance with the strategy and used for the test, or to make any amendments to the original strategy rules – please, feel free to contact us.

Our company specializes on automated trading systems and trading indicators development for the most popular trading platforms, such as MetaTrader 4/5, NinjaTrader 7/8 and cTrader.

If you need your own automated trading software designed based on your individual requirements, make a request for a free consultation with our team of professional programmers and find out the cost and terms of your project development.

More detailed info about our services for particular trading platform you can get at the following pages of our web-site:

MetaTrader 4/5 /metatrader-programming
NinjaTrader /ninjatrader-programming
cTrader /ctrader-programming

Disclaimer: Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity.

Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Past performance is not necessarily indicative of future results. The customer is responsible for using the product at his or her own risk and “Nordman Algorithms” is not responsible for any possible losses caused by use of the product, including but not limited to losses.

NORDMAN ALGORITHMS

TRADING SOFTWARE DEVELOPMENT

With financial background, using excellent programming techniques, developing automated trading systems of a splendid quality that serve your investing purpose.

CONTACT INFO

Mon - Fri : 08:00 - 18:00 EEST

[email protected]

11412, Majaka str. 26, HarjuCounty, Tallinn, Estonia

RISK DISCLOSURE

Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Please note, that testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.