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Stochastic Reversionthe same reading, smoothed twice

Evidence: WeakBeginnerMean reversion · Oscillator

The stochastic asks the same question as Williams %R — where in the recent range did this bar close — and then smooths the answer twice. %K is the raw reading; %D is %K averaged again.

That smoothing is what this page is for. It costs you two or three bars of lag and buys a large reduction in false signals, and the %D cross is the actual trigger, not the level. Most people trade the level and then wonder why the signal count is so high.

The evidence here is for reversion itself, not for this particular measure of it. The ruler below is a way of deciding when price has stretched far enough — it is not what makes it come back.

Category
Mean reversion · Oscillator
Timeframe
H1 primary · H4 for the trend filter
Suitable pairs
EURUSD · USDCHF · EURGBP · AUDUSD
Session
Signal at the bar close · London and New York
Indicators / tools
Stochastic (14, 3, 3) · EMA(50) as the trend filter · ADX(14)

Valid setup

MR-09 · STOCHASTIC REVERSION — VALID SETUP EURGBP · H1 · the trigger is the %K / %D cross, not the level — watch where the two lines meet LONG 0.85296 0.85348 0.85401 0.85454 0.85506 0.85559 0.85611 to the mean 1R EMA(50) TARGET = %K at 50 ENTRY STOP 1 2 3 4 0.85413 0.85418 0.85334 Stochastic (14, 3, 3) — %K solid, %D dashed 80 50 target 20 ① ADX under 22 — a smoothed oscillator needs a range ② %K closes under 20 ③ Both lines still under 30 — the permission, not the signal ④ %K crosses above %D — this is the trigger ⑤ Out if %K crosses back below %D before the target ⑥ Target %K at 50

Exact rules

Entry

  • Range gate: ADX(14) below 22. A smoothed oscillator in a trend stays pinned at one end for days.
  • Trend filter: price above the EMA(50) means long-only.
  • Setup: %K closes below 20.
  • Trigger: %K crosses above %D while both are still below 30. The cross is the signal; the level is only the permission.
  • Enter at that bar's close.

Stop loss

  • 1.2 × ATR(14) below the excursion low.
  • If %K crosses back below %D before the target, leave. The cross was the reason for entering and it has been withdrawn.
  • Risk 0.5%–1%.

Take profit / exit

  • %K reaching 50.
  • A partial at 1R is a reasonable variant.
  • Time exit after ten bars.

Build Stochastic Reversion

Reading this page is free and always will be. Taking it is what costs — the complete MQL5 for the rules above, yours to keep, permanently. Five of them cost $10 and they never expire.

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More from Mean reversion

RSI(2) Extremesthe short-period oscillatorBollinger Band Fadetwo standard deviationsZ-Score Reversionthe distance, stated plainly

Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.