###### Forex for a trader

How to Trade with Stochastic Oscillator. by Jeremy Wagner, CEWA-M , Head Forex Trading Instructor. Swing trading, chart patterns, breakouts, and Elliott wave. Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to Jeremy Wagner. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. Using Slow Stochatics to Trade Talking Points: Slow Stochastic provides clear signals in a forex strategy Take only those signals from overbought or oversold levels Filter forex signals so you are taking only those in the direction of the trend. Stochastic is a simple momentum oscillator developed by George C. Lane in the late 1950’s. Be ing a momentum oscillator, Stochastic can help determine when a currency pair is overbought or oversold . Since the oscillator is over 50 years old, it has stood the test of time , which is a large reason why m any traders use it to this day. Though there are multiple variations of Stochastic, today we’ll focus solely on Slow Stochastic.

Slow stochastic is found at the bottom of your chart and is made up of two moving averages. These moving averages are bound between 0 and 10 0. The blue line is the %K line and the red line is the %D line. Since %D is a moving average of %K , the red line will also lag or trail the blue line. Traders are constantly looking for ways to catch new trends that are developing. Therefore, momentum oscillators can provide clues when the market ’ s momentum is slowing down, which often precede s a shift in trend. As a result, a trader using stochastic can see these shifts in trend o n the ir chart. Learn Forex: Slow Stochastic Entry Signals. (Created by Jeremy Wagner) Momentum shifts directions when these two Stochastic lines cross . Therefore, a trader takes a signal in the direction of the cross when the blue line crosses the red line. As you can see from the picture above, the short term trends were detected by Stochastic. However, traders are always looking for ways to improve signals so they can be strengthened. There are two ways we can filter these trades to improve the strength of signal.

1 - Look for Crossovers at Extreme Levels. Naturally, a trader won’t want to take every signal that appears. Some signals are stronger than others. The first filter we can apply to the oscillator is taking cross overs that occur at extreme levels. Learn Forex: Filtering Stochastic Entry Signals. (Created by Jeremy Wagner) Since the oscillator is bound between 0 and 100, overbought is considered above the 80 level. On the other hand, oversold is considered below the 20 level. Therefore, cross downs that occur above 80 would indicate a potential shifting trend lower from overbought levels. Likewise, a cross up that occurs below 20 would indicate a potential shifting trend higher from oversold levels. 2 - Filter Trades on Higher Time Frame in Trend’s Direction. The second filter we can look to add is a trend filter. If we find a very strong uptrend, the Stochastic oscillator is likely to remain in overbought levels for an extended period of time giving many false sell signals. We would not want to sell a strong uptrend since more pips are available in the direction of the trend. (see “ 2 Benefits of Trend Trading ”) Therefore, if we find a strong uptrend, we need to look for a dip or correction to time a buy entry.

That means waiting for an intraday chart to correct and show oversold readings. At that point, if Stochastic crosses up from oversold lev els, then the selling pressure and momentum is likely alleviated . This provides us a signal to buy which is in alignment with the larger trend. In the EURJPY chart above, prices were well above the 200 Day Simple Moving Average (the moving average wasn’t shown because it was well below the current prices). Therefore, if we filtered trades according to the trend on a daily chart, then only the long signals (green arrows) would have been taken. Therefore, traders us e Stochastic to time entries for trades in the direction of the larger trend. Try it out for yourself. Try it out for yourself in a practice account. Not sure how to manage your risk on a trade?

We’ve researched millions of live trades and found this one little tweak to risk to reward ratios on trades increased the pool of traders who were profitable from 17% to 53%. ---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education. Follow me on Twitter at @JWagnerFXTrader. See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page. Learn how to incorporate other strategies and techniques into your trading to be a better trader by signing up for our free guide , Traits of Successful Traders. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Stochastic Oscillator Trading Strategy. Stochastic Oscillator Forex trading strategy — it's an interesting system with a rather low fail rate. It's based on a standard Stochastic Oscillator indicator, which signals a trend fatigue and change. That means that you will almost always enter on pull-backs, guaranteeing rather safe stop-loss levels. Simple to follow. Only one standard indicator used. Safe stop-loss levels. Take-profit level isn't optimal. Any currency pair and timeframe should work. But longer timeframes are recommended.

Add a Stochastic Oscillator indicator to the chart, set its %K period to 14, %D period to 7 and slowing to 7, use Simple MA method. Enter Long position when the cyan line crosses the red one from below and both are located in the bottom half of the indicator's window. Enter Short position when the cyan line crosses the red one from above and both are located in the upper half of the indicator's window. Set stop-loss to the local maximum if going Long and to the local minimum if going Short. The most comfortable level for take-profit is between 1 * SL and 1.5 * SL. Close position immediately if another signal is generated. Five signals for this strategy can be seen on the example chart above. All stop-loss levels are marked with the yellow horizontal lines on the chart. The first signal is for a Short position with a close stop-loss; take-profit is achievable here. The second one is a bullish signal, which turns out to be a wrong pull-back, but, fortunately enough, the stop-loss is quite tight here. The third signal is not a signal actually, because it is a bearish figure cross that appears in the lower half of the window and thus is disregarded. The fourth signal is bullish with a stop-loss quite far away, but even the most aggressive take-profit level would work here. The final signal is for Short, with tight stop-loss and a lot of place for a rather profitable TP setting.

Ideally bullish and bearish signals should follow one after another, but due to the occurrence of the false signals (bearish in the lower half and bullish in the upper half of the window), it is not always the case. Use this strategy at your own risk. EarnForex. com cannot be responsible for any losses associated with using any strategy presented on the site. It is not recommended to use this strategy on the real account without testing it on demo first. Do you have any suggestions or questions regarding this strategy? You can always discuss Stochastic Oscillator Strategy with the fellow Forex traders on the Trading Systems and Strategies forum. February 9, 2016 Posted by: Roman Sadowski Category: Forex Blog. There is much misunderstanding of technical indicators out there. Traders tend to use many indicators without researching or knowing what they are and how are they calculated.

Even less traders ever bother to test accuracy of indicators they use. You would be very surprise to find out that many of them have less than 30% accuracy but you still use them! This article will cover most important things every forex trader should know about Stochastic Oscillator. Points to cover: 1. You can use stochastics oscillator to measure the speed and momentum of a price over a time period. 2. A low value point to the strong uptrend as much as it points to a strong downtrend. 3. A high value points to the strong downtrend as much as it points to a strong uptrend. 4. Stochastic oscillator works best when used with leading indicators , chart patterns, and volume and price movement. 5. The trend following strategy can be a profitable one to use with stochastic 6. Stochastics oscillator must be paired with multi-frame analysis. Definintion: A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time. It is one of the earliest technical oscillators in securities trading used to predict future market direction. ‘Stochastic’ is Greek for ‘random’, and in the context of trading, refers to using past actions to forecast a future state. ‘Oscillator’ refers to repetitive variations up or down the equilibrium position. Formula Stochastics oscillator is measured using the %K and %D lines. %K = 100 (C – L14) (H14 – L14) C is the current closing price L14 is the lowest price when looking back at the 14 previous trading sessions H14 is the highest price when looking back at the 14 previous trading sessions %K tracks the most recent market rate for the currency pair. %D = 3 – period simple moving average of %K. It is also called the ‘stochastic slow’ due it slower reactions to market price changes compared to %K. Stochastic Oscillator is an index compiled with recent low and high of the price and put the current price in the context in % terms.

Characteristics. #1. Stochastic oscillator is a lagging indicator. 90% of all indicators are lagging indicators , including stochastics. It is important to grasp this concept right from the beginning. Once you understand, you will position yourself way ahead of other traders out there. It is important to note that. stochastics oscillator is price-driven as opposed to driving the price. All indicators built into a trading platform are being computed based on price data fed into that platform. If price isn’t recorded in the trading software, the indicators cannot be populated. There are four dimensions of the price – Open, Close, High, Low All indicators are a different versions of the same data source. Equation and time sets might change but the core of all of the is the same. To easily verify this, you can go to Meta Editor in Meta Trader4 And open the core files of any lagging indicator you wish. After inspecting the code, you will realize they are all using difference equations but the same core data. None of lagging indicators you are currently using are capable of predicting future price.

They simple cannot! Price is influenced by external factors, not the indicators. Having said that, making correct judgments even some of the time can be very rewarding and Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy. There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. #2. OverboughtOversold levels often indicate a strong trend, not a reversal. First off, there is a wrong belief that stochastic can point to overbought or oversold levels . A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal. There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below 20. To simply test any indicator in real time you can use the visual mode “Strategy tester” within your MetaTrader4 platform. Follow instructions below #1 #2 Select any of the indicators, select symbol, select timeframe, select visual mode and time period, Click start You will now see the price action unfolding on the screen together with the indicator of your choice. It doesn’t take long to see that Stochastic Oscillator does what we expect it to do only half the time! Trader can’t blindly follow overbought or oversold rule. As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly. Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal. When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis.

Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks. Buying would not be a great idea! #3. Stochastic Oscillator must be used in conjunction with other leading indicators. Traders use indicators for technical analysis in order to gain useful additional information. Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy. Look at it this way: by using a single indicator in isolation, you’re basing your entire strategy on just that and nothing else. To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements. Stochastic MUST an add-on to a much larger, sound trading strategy. This is its role! Take a look at the setup below. Larger trading strategy in this example is a sound price action technique. Trader waits for the price to make higher high at B (after A) He measures the retracement by Fib. The price pulled back to 38% @ point C. The long market entry can be placed here. Stochastic oscillator in this case serves as an additional confirmation of the reversal and plays a part within larger trading strategy. #4. It works best with the trend following strategy.

Trend following signals are strong as they take the market’s own movement into account. A basic stochastic trend following signal is a signal line crossover , occurring when the %K line crosses the %D line in confirmation with the trend. When %K (short-term line) crosses below %D (long-term trend) and returns above it, you can consider it an uptrend and a buy signal. The reverse holds true for a downtrend. Trend following is one of the most used strategies in forex trading. Stochastic can be used to enter the market on pullbacks within the trend. Pullbacks are short-term movements that go contrary to the existing direction of the price trend. If the market is moving above the simple market average – that is, in a bullish environment – you can consider entering long when a pullback occurs. When the price is below the average and a downtrend is on the cards, you will need to wait for short entries on pullbacks occurring in the trend. #5. Always use Stochastic Oscillator on multi-frame.

Sometimes traders get confused analysis markets on many time frames at the same time. An hourly time frames may give you bearish signals but your daily or weekly time-frames may show bullish signals. If you wait for the lower time frame to revert to the direction of the larger time-frame, the stochastic will start showing bullish signals on both charts. But this is time-consuming. It is best to use one chart on which you will make decisions and view other timeframes to adjust your bias accordingly. The time dimension offers more confirmation on trend lines to make smarter decisions. Using multiframes initially can cause some confusion, but if you use them properly, you will be able to locate good entry points and make cleaner entries than if you were to use single frames. The above screenshot includes stochastic on a 30 minute, 4 hours and 1day chart in one window. This provides a broader reading on the market for better accuracy. Trader can line up large timeframe behavior to gain more insight. Ideal entry would be with all stochastics lined up on one side. Download multi-period-stochastic-indicator here. There is much more to trading than just a bunch of indicators on the chart. Trader must show deep understanding of the macro markets and economics first. Indicators should be used as an additional market entry tool, a confirmation rather than a strategy itself.

landing_block type=”newsletter” Best Stochastic Trading Strategy - Easy 6 Step Strategy. Day trading with the best Stochastic Trading Strategy is the name of the strategy we’ll discuss today. As the name suggests, this is a stochastic strategy suitable for day traders. The stochastic strategy is much the same as the Day Trading Price Action - Simple Price Action Strategy, but the only notable difference is that this time around, we incorporate into our strategy a technical indicator, namely the stochastic indicator. This is the best Stochastic trading strategy because you‘ll be able to identify market turning points with accurate precision. Warning! This can turn you into a modern sniper elite trader because the Stochastic indicator will only make you pull the trigger at the right time. A modern sniper elite trader only pulls the trigger on a trade when he is certain that he can pull a winning trade. We at Trading Strategy Guides. com looking forward to developing the most comprehensive library of Forex trading strategies that can really help turn your trading around. The favorite time frame for the Best Stochastic Trading Strategy is the 15-minute chart because we have taken the time to backtest best Stochastic Trading Strategy and the 15-minute TF came over and over again . If you’re a day trader, this is the perfect strategy for you. The stochastic strategy evolved into being one of the best stochastic strategies because, despite the stochastic indicator being a very popular indicator among traders, they have been using it the wrong way. Our team at Trading Strategy Guides.

com interprets the charts and the indicators in an unorthodox way, but at the same time, it’s very productive. Day trading might not be your thing, but perhaps you’re interested in trading on the higher time frames, like the daily chart. Don’t panic; we have your back, our favorite MACD Trend Following Strategy is the best trend following strategy. For every Forex strategy, we at Trading Strategy Guides. com have developed we make sure we leave our own signature and make it simply the best. You can also read our best Gann Fan Trading Strategy. Before we move forward, we must define the indicators you need for day trading with the best Stochastic Trading Strategy and how to use stochastic indicator. The only indicator you need is the: Stochastic Indicator : The stochastic indicator was developed by George Lane more than 50 years ago. The reason why the stochastic indicator survived for so many years is because of the popularity of this indicator and also because it continues to show consistent signals even in this current times. Without further ado, let’s move straight to the point and: Define what the Stochastic indicator is; How to use Stochastic indicator; What are the Stochastic indicator settings; The Stochastic indicator is a momentum indicator that shows you how strong or weak the current trend is. It helps you identify overbought and oversold market conditions within a trend. The stochastic indicator should be easily located on most trading platforms.

The Stochastic indicator looks like this: After extensive research and backtesting, we’ve found that the stochastic indicator is more suitable for day trading while indicator like the MACD is more suitable for swing trading. You should really check out our amazing MACD Trend Following Strategy that we decided to share with our trading community only recently. Another reputable oscillator is the RSI indicator which is similar to the Stochastic indicator, but we chose it over the RSI indicator because the Stochastic indicator puts more weight on the closing price which by the way is the most important price no matter what market you trade. This strategy can also be used to day trading stochastics with a high level of accuracy. Let me just quickly tell you how to use the stochastic indicator and how to interpret the information given by this amazing indicator so you can know what you’re trading. When the stochastic moving averages are above the 80 line, we’re in the overbought territory; conversely, when the stochastic moving averages are below the 20 line, we’re in oversold territory. Please have a look at the chart example below to see how to use stochastic indicator. So, how does the stochastic indicator work? The stochastic oscillator uses a quite complex mathematical formula to calculate the moving averages: %K = 100(C – L14)(H14 – L14) C = the most recent closing price L14 = the low of the 14 previous trading sessions H14 = the highest price traded during the same 14-day period %K= the current market rate for the currency pair %D = 3-period moving average of %K. See below where to locate the %D and %K lines: The mathematical formula behind the Stochastic indicator works on the assumption that the closing prices are more important in predicting oversold and overbought conditions in the market.

Based on this assumption the Stochastic indicator works to give you the best trade signals you can possibly find. What about the stochastic indicator setting? Best stochastic settings for 15 minute chart. The default settings for the stochastic indicator are 14,3,1. Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules. Let’s get started….. Day trading with the best Stochastic Trading Strategy. (Rules for a Buy Trade) Step #1: Check the daily chart and make sure the Stochastic indicator is below the 20 line and the %K line crossed above the %D line. We’re daytrading, but having in mind the higher time frame sentiment and trend. This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. Our team at Trading Strategy Guides. com has put a great deal of time in developing the best guide to Trading Multiple Time Frames – The Key to Successful Trading. The multiple time frame concept is important because it can give you a more robust reading of the current price action and more it can help you better time your entry and exit points. Note*: On the daily chart, it’s not necessarily for the stochastic moving averages to be below the 20 level.

They can be moving away from the oversold territory and the signal can still be valid, but it shouldn’t be above 50 level. Step #2: Move Down to the 15-Minute Time Frame and Wait for the Stochastic Indicator to hit the 20 level. The %K line(blue line) crossed above the %D line(orange line). This step is similar to the previous rule, but this time we apply the rules on the 15-minute time frame: wait for the Stochastic indicator to hit the 20 level and the %Kline (blue line) is crossing above the %D line (orange line). The 15-minute chart is the best time frame for day trading because is not too fast and at the same time not too slow. See figure below: It is said that the market can stay in overbought and oversold condition longer than a trader can stay solvent. So we want to take precautionary measures, and this brings us to the next step on how to use stochastic indicator. Step #3: Wait for the Stochastic %K line (blue moving average) to cross above the 20 level. We want to trade smarter, right? Well, because the %k is the fast moving average it’s enough just to wait for it to cross above the 20 level because the %D line will follow suit. We don’t want to wait too much either as this will result in reduced profit margin.

Right now is the time you should switch your focus to the price action, which brings us the next step of the best stochastic trading strategy. Step #4: Wait for a Swing Low Pattern to develop on the 15-Minute Chart. What is a Swing Low Pattern ? A Swing Low Pattern is a 3 bar pattern and is defined as a bar that has one preceding and one following bar with a higher low. Here is how to identify the right swing to boost your profit. A visual representation of the Swing Low pattern can be seen below: So far, so good, but still we haven’t answered the most important question that a trader has: Day trading stochastics: When to Enter? This brings us to the next rule of the Best Stochastic Trading Strategy. Step #5: Entry Long When the Highest Point of the Swing Low Pattern is Broken to the Upside. Nothing beats an illustration… So, after following the rules of the Best Stochastic Trading Strategy , a buy signal is only triggered once a breakout of the Swing Low Patterns occurs. Let’s turn our focus again to the EURUSD 15-minute chart presented earlier and see how to use stochastic indicator in combination with the Swing Low Pattern . See chart below: So at this point, your trade is running and in profit. Step #6: Use Protective Stop Loss placed below the most recent 15-minute Swing Low. You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of 5 pips away from the low, to protect yourself from possible false breakouts. Step #6: Take Profit at 2xSL. Knowing when to take profit is as important as knowing when to enter a trade.

The Best Stochastic Trading Strategy uses a static take profit, which is two times the amount of your stop loss. See figure below: Note** The above was an example of a buy trade using the Daytrading with the Best Stochastic Trading Strategy. Use the same rules – but in reverse – for a sell trade. In the figure below you can see an actual SELL trade example using the Best Stochastic Trading Strategy. We’ve applied the same Step #1 through Step#4 to help us identify the SELL trade and followed Step #5 to trigger our trade (see next figure). Conclusion for this stochastic strategy: Day trading with the Best Stochastic Trading Strategy is the perfect combination between how to correctly use stochastic indicator and price action. The success of the Best Stochastic Trading Strategy is derived from knowing to read a technical indicator correctly and at the same time make use of the price action as well. We also have training for the best short-term trading strategy. Our team at Trading Strategy Guides. com doesn’t claim to be perfect, but we have a solid understanding of how the market works. For those of you who are not fans of lower time frames, we recommend the “Fibonacci Retracement Channel Trading Strategy” which can be more suitable for your trading style. Thank you for reading! Please leave a comment below if you have any questions about Stochastic Trading Strategy! Also, please give this strategy a 5 star if you enjoyed it! ( 7 votes, average: 4.43 out of 5) Here is a quick video of the strategy: Please Share this Trading Strategy Below and keep it for your own personal use! Thanks Traders! February 9, 2016 Posted by: Roman Sadowski Category: Forex Blog.

There is much misunderstanding of technical indicators out there. Traders tend to use many indicators without researching or knowing what they are and how are they calculated. Even less traders ever bother to test accuracy of indicators they use. You would be very surprise to find out that many of them have less than 30% accuracy but you still use them! This article will cover most important things every forex trader should know about Stochastic Oscillator. Points to cover: 1. You can use stochastics oscillator to measure the speed and momentum of a price over a time period. 2. A low value point to the strong uptrend as much as it points to a strong downtrend. 3. A high value points to the strong downtrend as much as it points to a strong uptrend. 4. Stochastic oscillator works best when used with leading indicators , chart patterns, and volume and price movement. 5. The trend following strategy can be a profitable one to use with stochastic 6. Stochastics oscillator must be paired with multi-frame analysis.

Definintion: A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time. It is one of the earliest technical oscillators in securities trading used to predict future market direction. ‘Stochastic’ is Greek for ‘random’, and in the context of trading, refers to using past actions to forecast a future state. ‘Oscillator’ refers to repetitive variations up or down the equilibrium position. Formula Stochastics oscillator is measured using the %K and %D lines. %K = 100 (C – L14) (H14 – L14) C is the current closing price L14 is the lowest price when looking back at the 14 previous trading sessions H14 is the highest price when looking back at the 14 previous trading sessions %K tracks the most recent market rate for the currency pair. %D = 3 – period simple moving average of %K. It is also called the ‘stochastic slow’ due it slower reactions to market price changes compared to %K. Stochastic Oscillator is an index compiled with recent low and high of the price and put the current price in the context in % terms. Characteristics. #1. Stochastic oscillator is a lagging indicator. 90% of all indicators are lagging indicators , including stochastics.

It is important to grasp this concept right from the beginning. Once you understand, you will position yourself way ahead of other traders out there. It is important to note that. stochastics oscillator is price-driven as opposed to driving the price. All indicators built into a trading platform are being computed based on price data fed into that platform. If price isn’t recorded in the trading software, the indicators cannot be populated. There are four dimensions of the price – Open, Close, High, Low All indicators are a different versions of the same data source. Equation and time sets might change but the core of all of the is the same. To easily verify this, you can go to Meta Editor in Meta Trader4 And open the core files of any lagging indicator you wish.

After inspecting the code, you will realize they are all using difference equations but the same core data. None of lagging indicators you are currently using are capable of predicting future price. They simple cannot! Price is influenced by external factors, not the indicators. Having said that, making correct judgments even some of the time can be very rewarding and Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy. There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. #2. OverboughtOversold levels often indicate a strong trend, not a reversal. First off, there is a wrong belief that stochastic can point to overbought or oversold levels . A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal.

There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below 20. To simply test any indicator in real time you can use the visual mode “Strategy tester” within your MetaTrader4 platform. Follow instructions below #1 #2 Select any of the indicators, select symbol, select timeframe, select visual mode and time period, Click start You will now see the price action unfolding on the screen together with the indicator of your choice. It doesn’t take long to see that Stochastic Oscillator does what we expect it to do only half the time! Trader can’t blindly follow overbought or oversold rule. As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly. Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal. When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis. Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks. Buying would not be a great idea! #3. Stochastic Oscillator must be used in conjunction with other leading indicators. Traders use indicators for technical analysis in order to gain useful additional information. Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy. Look at it this way: by using a single indicator in isolation, you’re basing your entire strategy on just that and nothing else.

To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements. Stochastic MUST an add-on to a much larger, sound trading strategy. This is its role! Take a look at the setup below. Larger trading strategy in this example is a sound price action technique. Trader waits for the price to make higher high at B (after A) He measures the retracement by Fib. The price pulled back to 38% @ point C. The long market entry can be placed here. Stochastic oscillator in this case serves as an additional confirmation of the reversal and plays a part within larger trading strategy. #4. It works best with the trend following strategy. Trend following signals are strong as they take the market’s own movement into account. A basic stochastic trend following signal is a signal line crossover , occurring when the %K line crosses the %D line in confirmation with the trend.

When %K (short-term line) crosses below %D (long-term trend) and returns above it, you can consider it an uptrend and a buy signal. The reverse holds true for a downtrend. Trend following is one of the most used strategies in forex trading. Stochastic can be used to enter the market on pullbacks within the trend. Pullbacks are short-term movements that go contrary to the existing direction of the price trend. If the market is moving above the simple market average – that is, in a bullish environment – you can consider entering long when a pullback occurs. When the price is below the average and a downtrend is on the cards, you will need to wait for short entries on pullbacks occurring in the trend. #5. Always use Stochastic Oscillator on multi-frame. Sometimes traders get confused analysis markets on many time frames at the same time. An hourly time frames may give you bearish signals but your daily or weekly time-frames may show bullish signals. If you wait for the lower time frame to revert to the direction of the larger time-frame, the stochastic will start showing bullish signals on both charts.

But this is time-consuming. It is best to use one chart on which you will make decisions and view other timeframes to adjust your bias accordingly. The time dimension offers more confirmation on trend lines to make smarter decisions. Using multiframes initially can cause some confusion, but if you use them properly, you will be able to locate good entry points and make cleaner entries than if you were to use single frames. The above screenshot includes stochastic on a 30 minute, 4 hours and 1day chart in one window. This provides a broader reading on the market for better accuracy. Trader can line up large timeframe behavior to gain more insight. Ideal entry would be with all stochastics lined up on one side. Download multi-period-stochastic-indicator here. There is much more to trading than just a bunch of indicators on the chart. Trader must show deep understanding of the macro markets and economics first. Indicators should be used as an additional market entry tool, a confirmation rather than a strategy itself. landing_block type=”newsletter” How to Use the Stochastic Indicator. The Stochastic oscillator is another forex chart analysis indicator that helps us determine where a trend might be ending.

This simple momentum oscillator was created by George Lane in the late 1950s. Stochastics measures the momentum of price. If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price. The 2 lines are similar to the MACD lines in the sense that one line is faster than the other. How to Trade Forex Using the Stochastic. As we said earlier, the Stochastic tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100 . When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is oversold. As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought.

Looking at the currency chart above, you can see that the indicator has been showing overbought conditions for quite some time. Based on this information, can you guess where the price might go? If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen. Many forex traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be overbought or oversold. Over time, you will learn to use the Stochastic to fit your own personal forex trading style. How do I use Stochastic Oscillator to create a forex trading strategy? The stochastic oscillator is a momentum indicator that is widely used in forex trading to pinpoint potential trend reversals. This indicator measures momentum by comparing closing price to the trading range over a given period. The charted stochastic oscillator actually consists of two lines: the indicator itself is represented by %K, and a signal line reflecting the three-day simple moving average (SMA) of %K, which is called %D. When these two lines intersect, it signals that a trend shift may be approaching. In a chart displaying a pronounced bullish trend, for example, a downward cross through the signal line indicates that the most recent closing price is closer to the lowest low of the look-back period than it has been in the previous three sessions.

After sustained upward price action, a sudden drop to the lower end of the trading range may signify that bulls are losing steam. Like other range-bound momentum oscillators, such as the relative strength index (RSI) and Williams %R, the stochastic oscillator is also useful for determining overbought or oversold conditions. Ranging from 0 to 100, the stochastic oscillator reflects overbought conditions with readings over 80 and oversold conditions with readings under 20. Crossovers that occur in these outer ranges are considered particularly strong signals. Many traders ignore crossover signals that do not occur at these extremes. When creating trade strategy based on the stochastic oscillator in the forex market, look for a currency pair that displays a pronounced and lengthy bullish trend. The ideal currency pair has already spent some time in overbought territory, with price nearing a previous area of resistance. Look for waning volume as an additional indicator of bullish exhaustion. Once the stochastic oscillator crosses down through the signal line, watch for price to follow suit. Though these combined signals are a strong indicator of impending reversal, wait for price to confirm the downturn before entry – momentum oscillators are known to throw false signals from time to time. Combining this setup with candlestick charting techniques can further enhance your strategy and provide clear entry and exit signals.

Best Stochastic Trading Strategy - Easy 6 Step Strategy. Day trading with the best Stochastic Trading Strategy is the name of the strategy we’ll discuss today. As the name suggests, this is a stochastic strategy suitable for day traders. The stochastic strategy is much the same as the Day Trading Price Action - Simple Price Action Strategy, but the only notable difference is that this time around, we incorporate into our strategy a technical indicator, namely the stochastic indicator. This is the best Stochastic trading strategy because you‘ll be able to identify market turning points with accurate precision. Warning! This can turn you into a modern sniper elite trader because the Stochastic indicator will only make you pull the trigger at the right time. A modern sniper elite trader only pulls the trigger on a trade when he is certain that he can pull a winning trade. We at Trading Strategy Guides. com looking forward to developing the most comprehensive library of Forex trading strategies that can really help turn your trading around. The favorite time frame for the Best Stochastic Trading Strategy is the 15-minute chart because we have taken the time to backtest best Stochastic Trading Strategy and the 15-minute TF came over and over again . If you’re a day trader, this is the perfect strategy for you. The stochastic strategy evolved into being one of the best stochastic strategies because, despite the stochastic indicator being a very popular indicator among traders, they have been using it the wrong way. Our team at Trading Strategy Guides. com interprets the charts and the indicators in an unorthodox way, but at the same time, it’s very productive. Day trading might not be your thing, but perhaps you’re interested in trading on the higher time frames, like the daily chart.

Don’t panic; we have your back, our favorite MACD Trend Following Strategy is the best trend following strategy. For every Forex strategy, we at Trading Strategy Guides. com have developed we make sure we leave our own signature and make it simply the best. You can also read our best Gann Fan Trading Strategy. Before we move forward, we must define the indicators you need for day trading with the best Stochastic Trading Strategy and how to use stochastic indicator. The only indicator you need is the: Stochastic Indicator : The stochastic indicator was developed by George Lane more than 50 years ago. The reason why the stochastic indicator survived for so many years is because of the popularity of this indicator and also because it continues to show consistent signals even in this current times. Without further ado, let’s move straight to the point and: Define what the Stochastic indicator is; How to use Stochastic indicator; What are the Stochastic indicator settings; The Stochastic indicator is a momentum indicator that shows you how strong or weak the current trend is. It helps you identify overbought and oversold market conditions within a trend. The stochastic indicator should be easily located on most trading platforms. The Stochastic indicator looks like this: After extensive research and backtesting, we’ve found that the stochastic indicator is more suitable for day trading while indicator like the MACD is more suitable for swing trading. You should really check out our amazing MACD Trend Following Strategy that we decided to share with our trading community only recently. Another reputable oscillator is the RSI indicator which is similar to the Stochastic indicator, but we chose it over the RSI indicator because the Stochastic indicator puts more weight on the closing price which by the way is the most important price no matter what market you trade. This strategy can also be used to day trading stochastics with a high level of accuracy. Let me just quickly tell you how to use the stochastic indicator and how to interpret the information given by this amazing indicator so you can know what you’re trading.

When the stochastic moving averages are above the 80 line, we’re in the overbought territory; conversely, when the stochastic moving averages are below the 20 line, we’re in oversold territory. Please have a look at the chart example below to see how to use stochastic indicator. So, how does the stochastic indicator work? The stochastic oscillator uses a quite complex mathematical formula to calculate the moving averages: %K = 100(C – L14)(H14 – L14) C = the most recent closing price L14 = the low of the 14 previous trading sessions H14 = the highest price traded during the same 14-day period %K= the current market rate for the currency pair %D = 3-period moving average of %K. See below where to locate the %D and %K lines: The mathematical formula behind the Stochastic indicator works on the assumption that the closing prices are more important in predicting oversold and overbought conditions in the market. Based on this assumption the Stochastic indicator works to give you the best trade signals you can possibly find. What about the stochastic indicator setting? Best stochastic settings for 15 minute chart. The default settings for the stochastic indicator are 14,3,1. Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules. Let’s get started…..

Day trading with the best Stochastic Trading Strategy. (Rules for a Buy Trade) Step #1: Check the daily chart and make sure the Stochastic indicator is below the 20 line and the %K line crossed above the %D line. We’re daytrading, but having in mind the higher time frame sentiment and trend. This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. Our team at Trading Strategy Guides. com has put a great deal of time in developing the best guide to Trading Multiple Time Frames – The Key to Successful Trading. The multiple time frame concept is important because it can give you a more robust reading of the current price action and more it can help you better time your entry and exit points. Note*: On the daily chart, it’s not necessarily for the stochastic moving averages to be below the 20 level. They can be moving away from the oversold territory and the signal can still be valid, but it shouldn’t be above 50 level.

Step #2: Move Down to the 15-Minute Time Frame and Wait for the Stochastic Indicator to hit the 20 level. The %K line(blue line) crossed above the %D line(orange line). This step is similar to the previous rule, but this time we apply the rules on the 15-minute time frame: wait for the Stochastic indicator to hit the 20 level and the %Kline (blue line) is crossing above the %D line (orange line). The 15-minute chart is the best time frame for day trading because is not too fast and at the same time not too slow. See figure below: It is said that the market can stay in overbought and oversold condition longer than a trader can stay solvent. So we want to take precautionary measures, and this brings us to the next step on how to use stochastic indicator. Step #3: Wait for the Stochastic %K line (blue moving average) to cross above the 20 level. We want to trade smarter, right? Well, because the %k is the fast moving average it’s enough just to wait for it to cross above the 20 level because the %D line will follow suit.

We don’t want to wait too much either as this will result in reduced profit margin. Right now is the time you should switch your focus to the price action, which brings us the next step of the best stochastic trading strategy. Step #4: Wait for a Swing Low Pattern to develop on the 15-Minute Chart. What is a Swing Low Pattern ? A Swing Low Pattern is a 3 bar pattern and is defined as a bar that has one preceding and one following bar with a higher low. Here is how to identify the right swing to boost your profit. A visual representation of the Swing Low pattern can be seen below: So far, so good, but still we haven’t answered the most important question that a trader has: Day trading stochastics: When to Enter? This brings us to the next rule of the Best Stochastic Trading Strategy. Step #5: Entry Long When the Highest Point of the Swing Low Pattern is Broken to the Upside. Nothing beats an illustration… So, after following the rules of the Best Stochastic Trading Strategy , a buy signal is only triggered once a breakout of the Swing Low Patterns occurs.

Let’s turn our focus again to the EURUSD 15-minute chart presented earlier and see how to use stochastic indicator in combination with the Swing Low Pattern . See chart below: So at this point, your trade is running and in profit. Step #6: Use Protective Stop Loss placed below the most recent 15-minute Swing Low. You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of 5 pips away from the low, to protect yourself from possible false breakouts. Step #6: Take Profit at 2xSL. Knowing when to take profit is as important as knowing when to enter a trade. The Best Stochastic Trading Strategy uses a static take profit, which is two times the amount of your stop loss. See figure below: Note** The above was an example of a buy trade using the Daytrading with the Best Stochastic Trading Strategy. Use the same rules – but in reverse – for a sell trade. In the figure below you can see an actual SELL trade example using the Best Stochastic Trading Strategy. We’ve applied the same Step #1 through Step#4 to help us identify the SELL trade and followed Step #5 to trigger our trade (see next figure). Conclusion for this stochastic strategy: Day trading with the Best Stochastic Trading Strategy is the perfect combination between how to correctly use stochastic indicator and price action.

The success of the Best Stochastic Trading Strategy is derived from knowing to read a technical indicator correctly and at the same time make use of the price action as well. We also have training for the best short-term trading strategy. Our team at Trading Strategy Guides. com doesn’t claim to be perfect, but we have a solid understanding of how the market works. For those of you who are not fans of lower time frames, we recommend the “Fibonacci Retracement Channel Trading Strategy” which can be more suitable for your trading style. Thank you for reading! Please leave a comment below if you have any questions about Stochastic Trading Strategy! Also, please give this strategy a 5 star if you enjoyed it! ( 7 votes, average: 4.43 out of 5) Here is a quick video of the strategy: Please Share this Trading Strategy Below and keep it for your own personal use! Thanks Traders! Forex stochastic strategy. Stochastic MACD Strategy is based on one of the most common combinations of indicators. The strategy combines popular MACD trend-following strategy and classic Stochastic rebound strategy.

It is known that Stochastic Indicator works badly in trending markets. In other words, trend distorts Stochastic Indicator readings and produces false signals. In its turn, MACD indicator gives false signals during stagnating, lateral movements of the market. The combination of this two indicators aims to take the best qualities of each. Short description of Stochastic. There are two components to the Stochastic oscillator the %K and the %D lines. The %K called Stochastic line, is the main line and represents Stochastic oscillation of the price for the last N bars. %D or the Signal line represents Moving Average of the %K line and shows momentum and trend of the indicator. As the classic oscillator, Stochastic ranges between 100 and 0. Ground rules for the Stochastic Oscillator: Stochastic line %K drops below 20 – asset is oversold; %K line rises above 80 – asset is overbought %K line is higher than %D line – asset is in uptrend; Stochastic line is lower than %D line – downtrend. MACD consists of two components: MACD histogram and Signal line. MACD histogram is the difference between two Moving Averages. The signal line is the Moving Average of the MACD histogram; it is used to spot trend and peaks in the indicator. As MACD represents the difference between two MA, it is not ranged between max and min values. MACD oscillates about the zero line. Rules for MACD: MACD histogram higher than zero line – asset is in uptrend; MACD histogram lower Histogram crossing the Signal Line from bottom-up – uptrend signal or end of the downtrend; MACD histogram crosses the Signal line from above-down – downtrend or end of the uptrend.

Rules for the strategy. The strategy consists of two logical steps: first – determine trend direction with the help of MACD Indicator; second – determine entry point within trend direction with the Stochastic Oscillator Indicator. Since we are using MACD as trend filter and Stochastic as trade trigger, MACD should have a bigger period than Stochastic Oscillator. For intraday trading on forex pair EURUSD we recommend the following settings: Timeframe – 15m; MACD (24, 200, 14); Stochastic (9,5,3) Any trading instrument is suitable To avoid the impact of market noise we recommend to use time frames higher than 15 min; Install Stochastic Oscillator (we recommend following settings Stochastic (9,5,3); Install MACD (we recommend following settings MACD (24,200,14); Longer period MACD (24,200,14) shows weekly trend direction. Stochastic (9,5,3) shows entry points. The strategy follows simple rules: MACD shows current trend direction; Stochastic Oscillator shows entry points; Trades are open in the trend direction. MACD higher than 0 level Stochastic line %K is greater %D and crossing 20 level from bottom-up. MACD lower than 0 level Stochastic line %K is lower than %D crossing 80 level from above-down. The strategy allows several exit rules. In addition to the stop loss and take profit Stochastic Oscillator will be used to determine an end of the trading impulse. There are several rules to evaluate Stop Loss, which underlay different risk levels. Usually, Stop-Loss set to the support levels and pivot points.

These rules are listed for the Buy signal, for the Sell signal rules should be vice versa. Closest lower Pivot Point Minimum of the last bar (Suitable for the high time frames, 4h, 1D, 1W) Minimum of the current day Current Price – k* ATR (Average True Range show average price motion; k between 2 and 5) Take Profit is the desired level of profit and must correlate with Stop Loss level. One of the most important indexes of the strategy is relation SLTP. This relation is called riskreward level of the strategy. (rules are for the Buy signal): Last Pick (Visual Pick of the price for the reasonable period) Closest upper Pivot Point Maximum of the last bar (Suitable for the high time frames, 4h, 1D, 1W) Current price + k*Standard Deviation (Standard Deviation indicator stands for an average price motion; k between 0.5 and 1) Current price + k*ATR (ATR – average true range, calculated on a different principal than Standard Deviation; k between 0.5 and 2) In this strategy, Stochastic Oscillator reflects intraday price peaks and reversals on which trader enters the market, reverse signals of this indicator serve for exit signals. Nevertheless, MACD Indicator, which shows trend direction also should be considered. Rules for closing the Buy trade: Stochastic line %K crossed 20 level from above-down Line %K crossed signal line %D from above-down Line %K reached 80 level and crossed it from above-down MACD indicator loses momentum or crosses zero level from above-down (MACD histogram rapidly approaching zero. Mainly determined visually) This chart demonstrates several Buy signals in a row, all closed by the Early exit rules. Note that decreasing MACD accompanies calming market. The chart demonstrates sell trades during a downtrend. Stop Loss level are 60 pips, according to the weekly maximum and ATR level; Take Profit are 30 pips; All trades were closed by the early exit rules. Straightforward and profitable strategy, works best in trending markets. Strategy gives false signals during stagnating market periods.

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