Stochastic pullback strategy

Why it works

Lane's insight was that momentum changes direction before price. In a trend, the oscillator dropping below 20 shows the pullback has stretched; the cross back up shows buyers returning.

Used against the trend, "overbought" and "oversold" are traps: strong trends stay overbought for a long time. Used with the trend, they are timing tools.

The rules

Setup

• Uptrend: price above the 50-period EMA and the EMA rising.
• Stochastic (14, 3, 3) drops below 20.

Entry

• Buy when %K crosses above %D and both rise back above 20.

Stop loss

• Below the pullback low.

Exit and management

• Target 2R or the previous swing high.

Filters that improve it

• No longs below the 50 EMA.
• Skip if the pullback broke the previous swing low.

Worked example

Illustrative AUD/USD example on 1H: price is above a rising 50 EMA. A pullback takes the stochastic to 12. %K crosses %D and rises to 24 at 0.6610. Buy, stop below the low at 0.6590, target 0.6650.

Illustrative numbers, not a recommendation.

Common mistakes

• Shorting every reading above 80 in a strong uptrend.
• Entering while the stochastic is still falling.

How to practise it

In Candlemind add the Stochastic template from My indicators and turn on the EMA 50. Take only signals in the direction of the EMA and record the result.

Pre-trade checklist

1. Price above a rising 50 EMA
2. Stochastic below 20
3. %K crosses above %D
4. Both lines back above 20
5. Stop below the pullback low

Frequently asked questions