Forex for a trader
Forex trading using stochastics

Forex trading using stochasticsLearn How To Use The Stochastic Indicator Step By Step. Our Trading Courses & Mentorship. Join our team, learn our exact trading strategies , receive a new video with the best setups every week and benefit from our ongoing mentoring in our private community. Learn How To Use The Stochastic Indicator Step By Step. I am always astonished that many traders don’t really understand the indicators they are using. Or, even worse, many traders use their indicators in a wrong way because they have never taken the time to look into it. In this article, I will help you understand the STOCHASTIC indicator in the right way and I will show you what it does and how you can use it in your trading. What is the Stochastic indicator? The STOCHASTIC indicator shows us information about momentum and trend strength. As we will see shortly, the indicator analyses price movements and tells us how fast and how strong the price moves. This is a quote from George Lane, the inventor of the STOCHASTIC indicator: “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.” – George Lane, the developer of the Stochastic indicator. Before we get into using the Stochastic, we should be clear about what momentum actually is. Investopedia defines momentum as “ The rate of acceleration of the price of a security .

” via Investopedia. I am always a fan of going into how an indicator analyzes price and without getting too deep into the mathematics, this is how the indicator analyzes price: The stochastic indicator analyzes a price range over a specific time period or price candles; typical settings for the Stochastic are 5 or 14 periodsprice candles. This means that the Stochastic indicator takes the absolute high and the absolute low of that period and compares it to the closing price. We will see how this works with the following two examples and I have chosen a 5 period Stochastic which means that the Stochastic only looks at the last 5 candlesticks. Example 1: A high Stochastic number. When your Stochastic is at a high value, it means that price closed near the top of the range over a certain time period or number of price candles. The graphic shows that the low was at $60, the high at $100 (range of $40) and price closed almost at the very top at $95. The Stochastic shows 88% which means that price only closed 12% (100% – 88%) from the absolute top. How a high Stochastic is calculated: The lowest low of the 5 candles: $ 60 The highest high of the 5 candles: $ 100 The close of the last candle: $95 The value of the Stochastic indicator: (95 – 60 ) (100 – 60) * 100 = 88% You can see, the high Stochastic shows us that price was very strong over the 5 candle period and that the recent candles are pushing higher. Example 2: A low Stochastic number. Conversely, a low Stochastic value indicates that the momentum to the downside is strong.

In the graphic we can see that price only closed $5 above the low of the range at $50. How a high Stochastic is calculated The lowest low of the 5 candles: $ 50 The highest high of the 5 candles: $ 80 The close of the last candle: $55 The value of the Stochastic indicator: (55 – 50 ) (80 – 50) * 100 = 17% The Stochastic of 17% means that price closed only 17% above the low of the range and, thus, the downside momentum is very strong. Overbought vs Oversold. The misinterpretation of overbought and oversold is one of biggest problems and faults in trading. We’ll now take a look at those expressions and learn why there is nothing like overbought or oversold. The Stochastic indicator does not show oversold or overbought prices. It shows momentum . Generally, traders would say that a Stochastic over 80 means that the price is overbought and when the Stochastic is below 20, the price is considered oversold. And what traders then mean is that an oversold market has a high chance of going down and vice versa. This is wrong and very dangerous! As we have seen above, when the Stochastic is above 80 it means that the trend is strong and not, that it is overbought and likely to reverse. A high Stochastic means that the price is able to close near the top and it keeps pushing higher. A trend where the Stochastic stays above 80 for a long time signals that momentum is high and not that you should get ready to short the market.

The image below shows the behavior of the Stochastic within a long uptrend and a downtrend. In both cases, the Stochastic entered “overbought” (above 80), “oversold” (below 20) and stayed there for quite some time, while the trends kept on going. Again, the belief that the Stochastic shows oversoldoverbought is wrong and you will quickly run into problems when you trade this way. A high Stochastic value shows that the trend has strong momentum and NOT that it is overbought. The Stochastic signals. Finally, I want to provide the most common signals and ways how traders are using the Stochastic indicator: Breakout trading: When you see that the Stochastic is suddenly accelerating into one direction and the two Stochastic bands are widening, then it can signal the start of a new trend. If you can also spot a breakout out of sideways range, even better. Trend following : As long as the Stochastic keeps crossed in one direction, it shows that the trend is still valid. Strong trends: When the Stochastic is in the oversoldoverbought area, don’t fight the trend but try to hold on to your trades and stick with the trend. Trend reversals: When the Stochastic is changing the direction and leaves the overboughtoversold areas, it can foreshadow a reversal. As we’ll see, we can also combine the Stochastic with a moving average or trendlines nicely. Important : when we look for a bullish reversal, we need to see the green Stochastic line to get above the red one and leave the overbought-oversold area. Divergences : As with every momentum indicator, divergences can also be a very important signal here to show potential trend reversals, or at least the end of a trend. Combining the Stochastic with other tools. As with any other trading concept or tool, you should not use the Stochastic indicator by itself. To receive meaningful signals and improve the quality of your trades, you can combine the Stochastic indicator with those 3 tools: Moving averages : Moving averages can be a great addition here and they act as filters for your signals.

Always trade in the direction of your moving averages and as long as price is above the moving average, only look for longs – and vice versa. Price formations: As breakout or reversal trader, you should look for wedges, triangles and rectangles. When price breaks such a formation with an accelerating Stochastic, it can potentially signal a successful breakout. Trendline : Especially Stochastic divergence or Stochastic reversal can be traded nicely with trendlines . You need to find an established trend with a valid trendline and then wait for price to break it with the confirmation of your Stochastic. Recap: How to use the Stochastic indicator. You might not need the Stochastic indicator when you are able to read the momentum of your charts by looking at the candles, but if the Stochastic is the tool of your choice, it certainly does not hurt to have it on your charts (this goes without a judgment whether the Stochastic is useful or not). More importantly, this article is meant to make you realize how little you might know about the tools you use for your trading. Additionally, there is a lot of wrong knowledge being shared among traders and even widely used tools such as the Stochastic indicator is often misinterpreted by the majority of traders. Do not blindly believe what other people tell you, do your own research and build your trading knowledge. 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 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. 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.

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” 4 Simple Slow Stochastics Trading Strategies. Table of Contents. Slow Stochastic Definition. The slow stochastic indicator is a price oscillator that compares a security's closing price over "n" range. The most commonly used range for the slow stochastic indicator is 14. The slow stochastic formula is calculated as follows: Bonus: Download the free Tradingsim day trading ebook with over 10,000 words of trading strategies and techniques you can use to trade stocks, futures and bitcoin! Slow Stochastic Formula.

To calculate the slow stochastic, replace "n" with the range your are monitoring. If you plan on using 14, you will want to find the highest and lowest values over the last 14 trading bars. The slow stochastic can be calculated on any time frame. While I have provided the equation for calculating the slow stochastics so you can see "under the hood", I strongly advise you to just use the indicator as provided by your trading platform. Please do not pop out excel and start cranking through slow stochastics calculations using raw market data. Misconceptions of Slow Stochastics. Divergence in Slow Stochastics and Price Trend. Traders will often cite when a stock makes a higher high, but the stochastics does not exceed its previous swing high, that the trend is in jeopardy. This couldn't be the furthest thing from the truth.

The slow stochastics indicator ranges from 0 - 100. So, as a stock rallies, how can the stochastics continue to make higher highs if it hits 98.85? Unlike price which has no boundaries, the slow stochastics is an oscillator, so it will never truly mimic a security's price action. All that matters is that the stochastics continues in the direction of the primary trend. Oversold and Overbought Levels. Traders will often exit long trades when the slow stochastics crosses over 80 or will buy when the slow stochastics crosses under 20. The problem with this trading methodology is that if a stock is over 80, it should not be looked upon as overbought, but rather as trending strongly. Also, if the slow stochastic is below 20, this is a sign of weakness and without any other form of support present, the stock will likely continue lower. How to trade the slow stochastics profitably. Below are 4 trading strategies you can use when trading the slow stochastics. The strategies increase in complexity as we progress through each example. Please approach each strategy with an open mind as this will challenge the conventional thinking of how to use the slow stochastics indicator. Strategy #1 - Identify stochastics with smooth slopes. Stochastics that have smooth slopes, which move from overbought to oversold implies that the move down was sharp and without much reaction, thus strengthening the odds of a counter move up. Slow Stochastics Buy. While this is the simplest of slow stochastics strategies, it has its flaws. For starters, sharp moves up or down can start consolidation patterns prior to continuing the trend. If you were to simply place buy and sell signals because the of smooth slow stochastic slopes, you are headed down a rough road. Still not a believer, let's review a few charts. AMZN Drifting Lower.

Weak Slow Stochastics Buy Signal. After you get a few of these under you belt, take my word you will realize that you need more than a slow stochastics move where the fast line never crosses the slow line on the way down. While this strategy is the simplest, it doesn't mean easy profits. You will need to step it up a little on the analysis side of the house, if you want to make long sustainable profits. Strategy #2 - Follow the Sloppy Stochastics. Far to often new traders will buy oversold slow stochastic readings blindly. Remember, the slow stochastic is an oscillator and like any other oscillator, it can trend sideways for an extended period of time. Slow Stochastics False Signal. You will see the slow stochastics just sitting beneath the 20 line and you will say to yourself, this has been going on for too long. Trust me, you say you won't, but you will. This is the downside of indicators, it will give the impression that price action has to change course; however, all of us seasoned traders knows the market will do whatever it wants. Let's walk through a few working examples to get this point across. Flat Slow Stochastics. Choppy Slow Stochastics. In each of the above charts of Facebook and Apple you can see how the slow stochastics just began to flat line.

Mixed with emotions of needing to jump the market and the need to put on a trade, it's very easy to see how a trader can end up making a poor trading decision. In both instances, the rally never materialized and in addition to losing money, you are also losing time sitting in the position. So, where does this leave us? The simple answer is that you can take a position in the direction of the primary trend. For example, as you see the slow stochastics in Apple begin to stay under 20, use this as an opportunity to take a short position to ride Apple all the way down. Going in the direction of the sloppy slow stochastics will feel very strange at first. This emotion will be the normal human reaction that states something has to give and things can't keep going lower. At this exact moment, you need to fight the need to go counter to the trend and realize that the money is in the least path of resistance. Strategy #2 has a higher difficulty level then trading smooth slopes; however, it still lacks the context of the full technical picture of a security. Strategy #3 - Combine the Slow Stochastics with Trendlines. As we just mentioned earlier in the article, the slow stochastics can provide a number of false signals.

The best way I have determined to over come this flaw is to combine the slow stochastics with trendlines to identify proper entry and exit points. Slow Stochastics Buy Signal. The above image is a 5-minute chart of Apple. You can see how as Apple goes through its corrective move lower, it hits a support trendline twice and bounces higher. You will also notice the slow stochastics had a number of moves below 20 that either resulted in lower prices or sideways action. This is why as a trader you cannot blindly buy a stock just because the slow stochastics is under pressure. If you use the confluence of the stock hitting support in conjuction with a bottoming slow stochastic, then you are likely entering the trade at the right point. It may look like magic, but it's really not that complicated. The mechanics of the situation are such that the trend traders are buying as Apple hits support, at the same time the stochastics traders are buying the oversold reading. The key to this game is buying and selling right before everyone else does. If you have a way of identifying when multiple players will be taking the same action for various reasons, you my friend are ahead of the curve., This same approach for identifying buying opportunities works exactly the same on the sell side. Slow Stochastics Sell Signal.

The next chart is of Google and as you can see the stock was trending higher nicely. As the stock hit resistance for the third time, Google also had a slow stochastics reading of over 80. Just as I mentioned earlier about the false buy signals, look at the number of false sell signals. Beyond missing out on trading profits, allowing the indicator to whipsaw you like this would also rack up pretty hefty trading commissions. Now, I do not want to leave you with the impression that you can simply buy or sell a stock when (1) it is hitting a trendline and (2) going over 20 or above 80. Trading is not that simple. You can however utilize the slow stochastics to validate the health of a trend relative to previous peaks by seeing if the stock was able to make a higher or lower slow stochastics reading. This way you can size up a recent high relative to its predecessor to determine if its really time to sell or if the stock still has room to go, regardless if a trendline is staring you in the face. Strategy #4 - Pull the Trigger After the Slow Stochastics Crosses a Certain Threshold. Anyone on the web can figure out after reading the first 3 Google results that traders should be when the slow stochastics crosses above 20 and sell when the slow stochastics crosses below 80. So, if everyone can read this on the web, why do you think this approach will make you money? Another approach is to allow the slow stochastics to cross above a certain threshold to confirm that the counter move has in fact begun. This level could be 50, 61.8, 78.6, etc. The downside to this approach of course is that the move is likely to have a few points behind it before you enter the trade. On the flip side, this will prevent you from getting caught in a stock that is flat lining.

OAS Slow Stochastics. To illustrate this example, I will be using 61.8 as the trigger for entering any new long positions. This is of course a play on the 61.8% fibonacci level found throughout the market. In the above chart we see that the stock OAS crosses above 61.8 on the slow stochastics which confirms the move up. From this point, OAS has an. 4 percent up move before finally topping out. The key with using a higher slow stochastic reading prior to entering a buy signal is to use this method for fading morning gaps down. The reason this approach works well is it allows for you to validate the initial gap down is weakening and you can take a long position. If you were to go in the direction of a strong up trend and wait until 61.8 was crossed, you would likely be buying at the peak. This approach also works well in the late afternoon trading session. Those that follow the Tradingsim blog know that I personally do not trade in the afternoon; however, strategy #4 was built for late day setups. Later in the day, the market has less volume and well experience a number of false breakouts relative to the first hour of trading. To this point, as a day trader, you will need a method for assessing which breakouts or moves are valid. As always, a real-life example is worth a thousand words. Slow Stochastics Late Day Breakout. Notice how in the CLF example the stock had an expected retracement after the morning pop. Once CLF cleared 61.8 the stock went on a nice run up until 2:30 pm. By waiting on the slow stochastics to confirm the breakout in conjunction with the trendline break, you are allowing both the price action and technicals to confirm the start of a new uptrend. The slow stochastics is a great indicator for identifying the primary trend.

If you take it a step further and combine some basic technical analysis methods such as trendlines, you will be able to uncover some hidden trading opportunities in the market. Let’s Improve Your Trading Performance. TradingSim accelerates the steep learning curve of becoming a consistently profitable trader by allowing you to replay the market as if you were trading live today, for any day from the last 2 years – it’s really a trading time machine. To see how Tradingsim can help improve your bottom-line numbers, please visit our homepage. 4 Effective Trading Indicators Every Trader Should Know. by Tyler Yell, CMT , Forex Trading Instructor. Position Trading based on technical set ups, Risk Management & Trader Psychology. 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 Tyler Yell. 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. When your forex trading adventure begins, you’ll likely be met with a swarm of different methods for trading. However, most trading opportunities can be easily identified with just one of four chart indicators. Once you know how to use the Moving Average, RSI, Stochastic, & MACD indicator, you’ll be well on your way to executing your trading plan like a pro. You’ll also be provided with a free reinforcement tool so that you’ll know how to identify trades using these forex indicators every day. The Benefits of a Simple Strategy. Traders tend to overcomplicate things when they’re starting out in the forex market. This fact is unfortunate but undeniably true. Traders often feel that a complex trading strategy with many moving parts must be better when they should focus on keeping things as simple as possible. This is because a simple strategy allows for quick reactions and less stress. If you’re just getting started, you should seek the most effective and simple strategies for identifying trades and stick with that approach.

Discover the Best Forex Indicators for a Simple Strategy. One way to simplify your trading is through a trading plan that includes chart indicators and a few rules as to how you should use those indicators. In keeping with the idea that simple is best, there are four easy indicators you should become familiar with using one or two at a time to identify trading entry and exit points: Moving Average RSI (Relative Strength Index) Slow Stochastic MACD. Once you are trading a live account a simple plan with simple rules will be your best ally. Using Forex Indicators to Read Charts for Different Market Environments. There are many fundamental factors when determining the value of a currency relative to another currency. Many traders opt to look at the charts as a simplified way to identify trading opportunities – using forex indicators to do so. When looking at the charts, you’ll notice two common market environments. The two environments are either ranging markets with a strong level of support and resistance , or floor and ceiling that price isn’t breaking through or a trending market where price is steadily moving higher or lower. Using technical analysis allows you as a trader to identify range bound or trending environments and then find higher probability entries or exits based on their readings. Reading the indicators is as simple as putting them on the chart. Trading with Moving Averages. One of the best forex indicators for any strategy is moving average. Moving averages make it easier for traders to locate trading opportunities in the direction of the overall trend.

When the market is trending up, you can use the moving average or multiple moving averages to identify the trend and the right time to buy or sell. The moving average is a plotted line that simply measures the average price of a currency pair over a specific period of time, like the last 200 days or year of price action to understand the overall direction. Learn Forex: GBPUSD Daily Chart - Moving Average. You’ll notice a trade idea was generated above only with adding a few moving averages to the chart. Identifying trade opportunities with moving averages allows you see and trade off of momentum by entering when the currency pair moves in the direction of the moving average, and exiting when it begins to move opposite. The Relative Strength Index or RSI is an oscillator that is simple and helpful in its application. Oscillators like the RSI help you determine when a currency is overbought or oversold, so a reversal is likely. For those who like to ‘buy low and sell high’, the RSI may be the right indicator for you. The RSI can be used equally well in trending or ranging markets to locate better entry and exit prices. When markets have no clear direction and are ranging, you can take either buy or sell signals like you see above.

When markets are trending, it becomes more obvious which direction to trade (one benefit of trend trading ) and you only want to enter in the direction of the trend when the indicator is recovering from extremes. Because the RSI is an oscillator, it is plotted with values between 0 and 100. The value of 100 is considered overbought and a reversal to the downside is likely whereas the value of 0 is considered oversold and a reversal to the upside is commonplace. If an uptrend has been discovered, you would want to identify the RSI reversing from readings below 30 or oversold before entering back in the direction of the trend. Trading with Stochastics. Slow stochastics are an oscillator like the RSI that can help you locate overbought or oversold environments, likely making a reversal in price. The unique aspect of trading with the stochastic indicator is the two lines, %K and %D line to signal our entry. Because the oscillator has the same overbought or oversold readings, you simply look for the %K line to cross above the %D line through the 20 level to identify a solid buy signal in the direction of the trend. Trading with the Moving Average Convergence & Divergence (MACD) Sometimes known as the king of oscillators, the MACD c an be used well in trending or ranging markets due to its use of moving averages provide a visual display of changes in momentum. After you’ve identified the market environment as either ranging or trading, there are two things you want to look for to derive signals from this indictor. First, you want to recognize the lines in relation to the zero line which identify an upward or downward bias of the currency pair. Second, you want to identify a crossover or cross under of the MACD line (Red) to the Signal line (Blue) for a buy or sell trade, respectively. Like all indicators, the MACD is best coupled with an identified trend or range-bound market.

Once you’ve identified the trend, it is best to take crossovers of the MACD line in the direction of the trend. When you’ve entered the trade, you can set stops below the recent price extreme before the crossover, and set a trade limit at twice the amount you’re risking. Learn More about Forex Trading with our Free Guides. If you’re looking to boost your forex trading knowledge even further, you might want to read one of our free trading guides . These in-depth resources cover everything you need to know about learning to trade forex such as how to read a forex quote, planning your forex trading strategy and becoming a successful trader . You can also sign up to our free webinars to get daily news updates and trading tips from the experts. Best Stochastic Oscillator Settings & Trading Strategies. The Stochastic Oscillator indicator is one of the most powerful and profitable indicators in technical analysis and can be applied in the forex market, stock market and just about any market. However, most people tend to use it wrongly because they do not know what the best stochastic settings are and usually stick to the common 5 3 3 stochastic settings. They are also unaware of the secret profitable stochastic oscillator trading strategies that can be employed in any trading horizon, especially day trading and scalping. In this article, I will show you how to use the Stochastic Oscillator in ways you’ve never imagined before. Forex Stochastic Oscillator Strategy.

The Stochastic Oscillator, like the RSI, simply fluctuates between 0% and 100% with it commonly being used to identify overbought and oversold areas to trade off. The industry standard is to use 20% and 80% as these levels. 20% means price is about to bounce up and 80% means price is about to drop. However, while there is some logic in this, it is completely wrong . This is what the big players want you to believe – I will now show you the ways in which the big players (banks, hedge funds) use the Stochastic Oscillator to trade profitably. When used correctly, the Stochastic Oscillator can help you identify the following : Hidden support and resistance levels (horizontal) Hidden support and resistance levels (diagonal) Hidden breakout levels Bearish divergence reversals Bullish divergence reversals. We’ll cover all of this in this article and while we’re at this, it’s also worth taking a look at how to use RSI in a trading strategy along with finding the best support and resistance levels as these two other techniques can combine really well in providing you with an amazingly powerful trading strategy. Best Stochastic Settings. Now one of the key debating points when using the Stochastic Oscillator is what exactly is the best stochastic settings? Fast stochastic vs Slow stochastic, or maybe even full stochastic? Do we use 5, 10 or a 100 period in the settings? Well, let me give you the definitive truth in picking the best stochastic settings now : The best choice is a specially adapted slow stochastic because it filters out a lot of the choppy noise in the fast stochastic. I’ve searched high and low for an adapted slow stochastic but can never find it anywhere. Hence, I took it upon myself to code the TFA Stochastic Indicator which has some proprietary modifications to the existing stochastic indicator. It does a better job in filtering out all the noise caused by the normal fast and slow stochastic indicators.

A lot of people prefer to use the fast stochastic because it moves faster (duh) and hence generate more trading opportunities. But the thing is, especially in the forex world, being fast and furious often leads to going bust. Slow and steady is the way to go. Of course, we combine this with our other leading indicators to give us optimum trading opportunities since relying on stochastic alone is never enough (we’ll touch on this later). Next, the best period to use is not just one period, but to cycle between a range of periods to find which ones the market is adapting to best as the market is so smart that it often requires us to think out-of-the-box just to see what it is up to. Hence, instead of using the standard period of 5, we use a range of periods mainly 13, 21, 34 and 55. I will show you in examples later how we managed to predict the market’s movements with these unique settings. Stochastic Oscillator Strategy : Hidden Support and Resistance Levels (Horizontal) One of the more powerful features of the Stochastic Oscillator is its ability to pick bottoms and tops. Now most people use a simple 20% horizontal line as support and 80% horizontal line as resistance. While this is nice, it is also wrong . The trick is to look for hidden support and resistance levels based on what the market is providing you. In the examples below, I will show you how this is done. Notice that we use 12% as the support instead of 20%? We also use a Slow Stochastic Oscillator period of 34 instead of the standard 5. In the above example, you can see that we are not using 20% as the support on our Stochastic Oscillator, instead, we observed how the market tends to bounce off the 12% level.

From there, we can tell that the 12% support level is a much more important level which we can use to trade from. Since price is right at our buying entry level (determined by our best support and resistance indicator ) and Stochastic is right on 12% support, it would serve as a good entry level. Notice how Stochastic bounce off the 12% support perfectly and how price also did the same? The picture above is what happened a day after we decided to buy right at support. Price has bounced off perfectly as expected and Stochastic has bounced off the 12% support level perfectly as expected too. The trick then is to look out for hidden levels of support and resistance and not just trust the 20% support that the crowd follows. Below is another example of using the Stochastic Oscillator to perfection with hidden support levels. Notice how we use a 4% horizontal support on Stochastic instead? Also, we can see bullish divergence versus price which gives this even more power. In the above example, we can see how price tends to bounce off the 4% support level on the Stochastic Oscillator. We’re also using a period of 21 as it is able to best match recent price movement. Price is right on horizontal support and bollinger band support which signals a potentially good entry. We look for further confirmation in our Stochastic Oscillator and we can see that price is right above 4% support and displaying bullish divergence which is a strong sign that price is going to bounce off soon. RSI bounced perfectly off our 4% and price bounced perfectly to reach out profit target. Amazing, right?

In the above picture, you can see how Stochastic bounced perfectly off our 4% hidden support and along with it, price also bounced perfectly to reach our profit target. This is another brilliant example of the unknown stochastic trading strategies that I hope to make known to everyone. Don’t just drink the kool aid that the crowds are doing – think outside the box, keep an open mind and you’ll notice that the best stochastic strategy is not a fixed one, but a highly adaptive one like we are showing you. In the above picture, you can see how Stochastic bounced perfectly off our 4% hidden support and along with it, price also bounced perfectly to reach our profit target. This is another brilliant example of the unknown stochastic trading strategies that I hope to make known to everyone. Don’t just drink the kool aid that the crowds are doing – think outside the box, keep an open mind and you’ll notice that the best stochastic strategy is not a fixed one, but a highly adaptive one like we are showing you. So what does this teach us? This should teach us three key lessons : Do not stick to the standard 5 3 3 stochastic settings. It is also not necessary to use a fast or full moving average as a slow stochastic oscillator is sufficient. Swap between the 13, 21, 34, 55 settings and see if you can find horizontal support levels that line up well on the stochastic oscillator that also lines up well on price bounces. Do not use the standard 20% as support and 80% as resistance stochastic setting. Instead, do not be afraid to draw different horizontal lines and see which ones catches the most bottomstops and sees price reacts off the equally well too. This is finding your hidden support and resistance levels.

If you see bullish or bearish divergence on Stochastic versus price, even though the stochastic value may not be right on your support (like in the AUDNZD 4% support example above), it is an early signal that we’re going to see a bounce soon and can serve as a good confirmation. So go forth and practice this to perfect your craft. Many people use an RSI Stochastic strategy (which is basically combining both to provide further confirmation) to further improve their profitability considerably. Stochastic Oscillator Strategy : Hidden Support and Resistance Levels (Diagonal) Wait.. you mean you can use diagonal lines on the Stochastic Oscillator indicator to find support and resistance too? That’s madness! As amazing as that sounds, it is entirely true. This technique is a little bit more difficult compared to our earlier method on identifying horizontal support and resistance levels but when you do master it, you’ll start seeing things in a completely different light. Stochastic has been reacting off 90% resistance multiple times and finally broke the diagonal ascending line. In the above picture, we can see very clearly how price has been reacting off the 90% resistance line on the stochastic indicator multiple times. However, there’s a diagonal ascending line that is supporting it. When the stochastic finally makes a bearish exit of the diagonal ascending line (meaning it breaks below it), it triggers a further bearish move down from here. Price dropped perfectly as expected along with how Stochastic dropped perfectly too. In the example above, it’s clear to see how price has dropped perfectly as expected after the bearish exit of the diagonal ascending support line from the stochastic indicator. This is a perfect example of using the diagonal lines on stochastic indicators to predict when bearish moves would occur.

Such stochastics trading strategies are definitely more advanced and require more practice to easily see where the ascending or descending diagonal lines are and to forecast how a break of these lines would be a good signal of a bullishbearish move. What we usually look out for in bearish scenarios are : Is there an ascending support line on the stochastic indicator? Does price react well to the ascending support line (eg. every time stochastic touches the line, price similarly bounces up) Did the stochastic break the ascending support line from the top down? If yes, this would be a good pre-signal that we’re seeing a bearish move soon. What we usually look out for in bullish scenarios are : Is there a descending resistance line on the stochastic indicator? Does price react well to the descending resistance line (eg. every time stochastic touches the line, price similarly drops) Did the stochastic break the descending resistance line from the bottom up? If yes, this would be a good pre-signal that we’re seeing a bullish move soon. We can see how price is reacting well every time it touches the descending resistance line. In the above example, the key thing for us to focus on is how whenever stochastic touches the descending resistance line, there is a nice reaction on price. We expect price to continue dropping as stochastic continues to slowly rise to test the descending resistance line. Price rose perfectly as expected with stochastic and dropped perfectly as expected to our profit target. We can see in the example above how price rose to our selling area perfectly as expected and from there, dropped perfectly to our take profit target. This is the perfect example of how we can use the descending resistance line on our stochastic indicator to forecast when potential price reversals are about to happen.

This can of course be applied to ascendingdescending supportresistance lines too. If stochastic is above an ascending support line, it means that there is a possibility of a potential bounce. As a rule of thumb, for bullish scenarios, we usually look for ascending support lines on our stochastic indicator. For bearish scenarios, we look for descending resistance lines on our stochastic indicator. I usually prefer it if price has at least reacted off our ascendingdescending lines at least 2 to 3 times prior as it would show that that is a valid line to consider. Stochastic Oscillator Strategy : Bearish divergence and Bullish divergence. Now we move on to the art of divergence. It is a very simple concept and is usually used in conjunction with the above mentioned 2 stochastic oscillator strategies (horizontal support and resistance, diagonal support and resistance). Before we begin, I recall when I first tried to understand bullish and bearish divergence, I had a lot of problems understanding what swing high and swing lows are. To that tune, I have put together a neat video identifying what swing highs and swing lows are so we can move forward in this tutorial with ease. A stochastic bullish divergence is very simple : 1. Price makes a lower swing low 2. Stochastic makes a higher swing low. Think of it as the stochastic indicator is the ‘true’ indicator. It is making higher swing lows (meaning the market is rising) but yet price is making lower swing lows – something is not right and the stochastic oscillator has detected this particular divergence.

A stochastic bearish divergence is simply the opposite : 1. Price makes a higher swing high 2. Stochastic makes a lower swing high. When this happens, what the stochastic is saying is : hey buddy, we’re supposed to be making lower swing highs (in essence, a descending market) but you’re making higher swing highs, something is wrong with this divergence. We can see stochastic displaying bearish divergence vs price which is an excellent signal of an impending bearish move. In this example, we can see a bearish divergence in progress. It’s similar to the example above but this time we highlight that on top of seeing horizontal resistance on stochastic, we are seeing a bearish divergence too and this always gives us further confirmation of an impending drop. Why this trade was such a high probability of success trade is because there are so many factors coming in : 1. Price is on channel resistance 2. Price is testing a previous swing high 3. Stochastic is reacting off horizontal resistance 4. Stochastic has made a bearish exit of diagonal line 5. Stochastic is displaying bearish divergence. 5 factors! This is a perfect example of how you ensure you make high probability trades. The result from that is price dropping perfectly from that level as seen in the picture below : We can see how price fell perfectly along with our stochastic oscillator. So there we have it. A complete guide to learning how to trade using stochastics. This system, when combined with our RSI trading strategy and our support and resistance strategy , produces some of the most profitable and accurate trades. Always remember that the more factors you can combine to your advantage, the higher chances your trade would be profitable.

I hope you also realize that there’s isn’t a single best stochastic setting for swing trading or scalping or day trading, rather, it’s a combination of settings whether we toggle between the 21, 34 or 55 period and whether we look out for horizontal lines or diagonal lines. It’s an art and once you’ve trained yourself long enough, you’ll start to see these hidden patterns with much more ease. If you know someone who trades, then please share this article with them through the buttons below so they can learn how to use the stochastic oscillator properly and profitably.


  • Forex trading using stochastics