Forex for a trader
How to use stochastic oscillator in forex

How to use stochastic oscillator in forexForex Stochastic Oscillator Formula for Day Trading. Any trading platform offers multiple indicators for analyzing a market. Either trend ones or oscillators, they help traders finding places to buy or sell. The Forex Stochastic oscillator is an accurate indicator for both scalping and swing trading. Moreover, the stochastic oscillator formula is simple and easy to use. Trading is a game of probabilities. As long as traders understand there’s no magic formula that works one hundred percent of the times, profits will come. The idea is to find a proper way to make money with the winning trades. Of course, the bigger the winning rate, the better. Risk management or money management plays an important role. Most of the times, traders face difficult decisions.

In theory, it sounds very simple. Every trader knows heshe needs to cut losses asap. Or to let profits run. Everyone agrees with that. Yet, this is a difficult thing to put into practice. The stochastic oscillator comes to help with this decision. As often is the case, retail traders end up losing money despite correctly reading the market. Greed and fear are the worse enemies. You may know where the market goes, but this doesn’t mean you’ll make a profit. Discipline and patience matter the most, while an indicator like the Forex stochastic one comes to help. Its biggest advantage is visibility.

Traders see any signals generated and have plenty of time to react. This is especially true if the time frame is big enough. Another plus comes from its characteristics. It is essentially following the market. The currency pair makes a new high? Chances are, the stochastic oscillator Forex indicator does the same. If not, trading strategies derive from it. What is Stochastic Oscillator? First of all, being an oscillator, it appears at the bottom of a chart. Any oscillator appears in a separate window at the bottom of a chart.

This tells much about its usability: to spot fake moves the price may make. Second, it has two lines: the main and the signal line. They go hand in hand on that small window below the chart, and all eyes should be on these two lines. The signal one (the MetaTrader shows it with the red color) is a fast moving average, while the main one is a bit slower. The default settings show the 5 and 3 periods for the two lines, with the fastest one having the smaller number. While the default scenario uses a simple moving average, any type works: exponential, smoothed, etc. All options work just fine. George Lane, the guy who developed the stochastic indicator Forex traders use, was a smart guy. He wanted to have an indicator that measures the difference between the actual price and the price range over a period of time. And this is exactly what the stochastic oscillator calculation shows. One thing is important here. The default settings are just default settings. By no means, one cannot change them.

However, before doing that, keep in mind the two lines will flatten. This will make trading signals difficult, if not impossible to spot. Not to mention, irrelevant. For this reason, it’s best to use it with the default settings. If you apply it on a regular chart, it will look exactly like the image below. The usual caveat applies here too: the bigger the time frame, the bigger the implications. Stochastic Oscillator Formula. Before discussing the actual formula, we should look at what it means. The indicator travels only in positive territory: between the zero and one hundred levels. You’ll never see values bigger than one hundred or smaller than zero. This just comes from how the stochastic oscillator parameters work.

As mentioned above, its formula considers the main and the signal lines. The main line is %K and the signal %D. The actual formula is irrelevant. What matters the most for Forex traders is to know how to read the stochastic oscillator, not the mathematical formula. For math fans, though, this is how the mainline formula looks like: %K = 100(C – L5close)(H5 – L5) where C = the most recent closing price L5 = the low of the five previous trading sessions H5 = the highest price traded during the same 5 day period. The %D line is much simpler: %D = 100 X (H3L3). Now you know why the oscillator comes with the 5 and 3 values as the default ones: the five and the three day-periods make up the formula. As a rule of thumb, an oscillator’s purpose is to detect a lie. Or a fake move that price might make. Between the price and an oscillator, traders should always trust the oscillator. How come? The answer is straightforward: there are more periods considered, whereas the price shows the current market stance. If one of the two is making a fake move, the price is the one. Hence, the Forex stochastic oscillator settings for day trading work best when traders use them against the current price.

Stochastic Oscillator Settings for Scalping. Traders open and close a position based on various things. The most important one is time. To be more exact, the time horizon of a trade gives the type of the trading style used. Therefore, swing traders consider a few hours or even days for a trade. Investors don’t worry about time that much. What they do is they focus on the macro-picture. For investors, it matters most to be fundamentally right, then quick profits. And then there are scalpers. This is where the average Joe, the Forex retail trader fits into. Retail traders start with a huge disadvantage: their own expectations related to trading. Most of them come to Forex trading for a quick and fast buck.

The quicker, the better. The less effort, even better. Trading doesn’t work this way. Or, it may, but is not profitable this way on the long run. Yet, the stochastic oscillator formula is the same for all investors. The only difference comes from the time frame used. Here’s a quick guide for correlating a Forex stochastic strategy with the right time frame, having the time for a trade in mind: – investors use it on the weekly and monthly charts, focusing on the last one – swing traders come down to the daily, four-hour and hourly charts – scalpers typically use the five-minute and lower time frames. The strategies with the Forex stochastic oscillator to be explained here follow George Lane’s intention. That is, to create an indicator based on a simple formula that helps to spot fake moves. The beauty of this indicator is that all traders can use it. Are you in for a quick buck and scalping suits your personality? Use the stochastic indicator!

Is swing trading your thing? How about trying this indicator? Even investors find tremendous value in it. How to Use the Forex Stochastic Oscillator? George Lane wanted multiple things from this oscillator. And, in a way, he did a great job. Any oscillator, in the end, shows overbought and oversold levels. Hence, the first thing to look for is to buy oversold and sell overbought levels. But, an oscillator is more than that. The focus should always stay on it. When dealing with an oscillator, some traders won’t even look at the actual price. They simply trade the oscillator’s moves more than the ones the price does. Because the idea is to find out fake moves for the actual price, traders look for divergences. To be more exact, divergences between the price and the oscillator. Hence, a great stochastic oscillator strategy is to trade these divergences. Moreover, if the absolute range is between zero and one hundred, can we do something about it? Is there any stochastic oscillator trading strategy derived from this? The rest of this article deals with three ways that show how to use stochastic oscillator.

For this, we’re using the default settings, just like George Lane intended. All of them have one thing in common: they consider the cross between the signal and the main line. As always, keep in mind the time frame. The bigger it is, the bigger the implications for every strategy described below. Trading Overextended Levels. In Forex trading, overextended refers to overbought or oversold levels. Therefore, the standard interpretation of an indicator that shows such levels is the following: buy oversold and sell overbought. The chart below shows the EURUSD hourly time frame. Moreover, this stochastic oscillator trading strategy uses the current prices. This is important as one can test the relevance of it. The stochastic oscillator indicator shows overbought and oversold levels above or below 80, respectively 20. However, keep in mind what was mentioned earlier: the cross between the two lines matter. As such, using the Forex stochastic oscillator this way assumes traders should look for a cross in an overbought or oversold territory. More exactly, above 80 or below 20. Since these are the levels, they give the entries.

The idea is to sell on a cross above 80 and stay short until the fast line reaches the 20 level. And then, reverse. Go long on a cross below 20 and stay that way for the fast line to reach the 80 area. This approach of how to read the stochastic oscillator worked like a charm. At least, the EURUSD hourly chart above shows great entries. However, there’s a catch: it works when the market is in a range. The problem comes from the way the market behaves. While ranges predominate, they will be broken. Eventually! And when that happens, no overbought and oversold level can help your trading account. In trading, there’s a saying: the market can stay in overboughtoversold areas more than a trader stays solvent. That is so true! As a consequence, there must be some other ways of using stochastic oscillator when the market breaks a range.

A stochastic oscillator divergence will show the right direction. Moreover, if used with proper riskreward ratios and a disciplined approach, trading is fun. How to Use Stochastic Oscillator Divergences. A divergence forms when the price does something different than the oscillator. Or, the other way around. In both cases, one is lying, and that one is the price. Hence, traders should focus on the oscillator, rather than the price. Divergences are of two types: bullish and bearish ones. The rule calls for long trades after a bullish divergence and short trades to follow a bearish one. Needless to say, bullish divergences appear at the end of bearish trends, and bearish divergences at the end or bullish ones. Therefore, trading them is risky! Have you ever heard of “catching a falling knife” in trading? If yes, it was invented when traders bought bullish divergences.

However, traders are of two types: conservative and aggressive ones. Aggressive traders will always look to buy the absolute low. That is possible but very difficult. How about waiting for a confirmation? Divergences show how to use stochastic oscillator in Forex trading when a decision needs to be made. Have a look at the chart below in order to understand what a divergence is and how the market confirms it. Unfortunately, not everyone waits for a confirmation. That is when trading becomes expensive. Aggressive traders will argue here that better riskreward ratios derive from being earlier in a trade. As a side note, the reward should be always bigger than the risk. Two, three or even higher multiples are part of a successful trader’s toolkit.

In any case, divergences give an educated guess regarding the future price direction. If anything, they show the trend hesitation. The oscillator’s ability to diverge from price tells much about the undergoing momentum or the current move’s lack of strength. As a tip, when looking for divergences, try to find two higherhighs or lowerlows that the oscillator doesn’t confirm. Crossing the Middle Range. The example above shows what conservative traders should look at before entering a trade. The bearish divergence gets confirmed by price moving below the lowest value of the previous swing. That is when selling should take place. After all, when dealing with your own money, you want to take all the precautionary measures possible. Besides the two strategies from above, there’s another way that shows how to use stochastic oscillator in Forex. The key to this is to use a trick given by the stochastic oscillator formula. How about splitting the range?

The entire range matters here, not the one between overbought and oversold areas. Having said that, the middle point between one hundred and zero is fifty. We can edit the indicator by right-clicking on the chart area, select it from the Indicators List and choosing the Levels tab. Simply add the 50 value, select the color and style, and it will appear on the oscillator’s window. The idea behind this strategy is simple: use the 50 level as a continuation pattern. It means we should buy when the level gets crossed from below and sell when the oscillator comes from above. Such a simplistic approach fails more than succeeds. But this doesn’t make it unprofitable. Whit risk-reward ratios bigger than 1:2 or 1:2.5 the account grows nicely. The targets for this Forex stochastic oscillator strategy differ with the time frame. On a five-minute chart, smaller targets come with bigger volume. The opposite is true on bigger time frames: volumes drops on behalf of a bigger target.

Not once, traders fall prey to false expectations. Everyone looks for the holy grail in trading: find a strategy that works all the time. Instead, people should focus on a strategy that works MOST of the times. That makes money! Video Example of the Stochastic Oscillator. And now you have the wonderful opportunity to see the Stochastic Oscillator in action for free. Below you will find a video that shows one of my trades with the Stochastic. I managed to match an overbought Stochastic signal with a price bounce from a bearish trend line. Therefore, I shorted the GBPUSD on the assumption that the price is about to decrease. Meanwhile, a Double Top chart pattern was confirmed on the chart, which gave additional support for my short trading decision. See the video for free by entering your details! This article used the standard stochastic oscillator settings to show ways to trade with it. However, the best stochastic settings for day trading are the ones that consider risk management. In trading, this is more important than any trade setup. If you don’t understand the risk, you don’t know the reward.

Both of them matter in the end. This is the idea of any oscillator, no matter its name. Even though overbought or oversold levels aren’t specified, it is easy to build them. Likewise, divergences show the right direction when used with any oscillator. If that is the case, what is stochastic oscillator showing differently than other indicators? What makes it so special? Firstly, it shows a cross. This cross acts as a signal. One cannot say the trade was missed if the cross is in place. Secondly, when the cross forms above the 80 level, you simply don’t want to be long. Or short, if a bullish cross is below the 20 level. When this happens on the five-minute chart, missing it is not a problem. However, on the daily and above, this is a costly mistake. In Forex trading, mistakes translate in losing money. We all want to avoid that.

Last but not least, the Forex stochastic oscillator formula allows for multiple ways to trade it. Either selling a bearish divergence or buying a bullish one, a proper money management system and discipline result in the account growing in time. A trader has the best results when trading follows the rules. Rules, on the other hand, make a trading system and this, in turn, may, or may not be profitable. The profitability degree depends on the indicators used, and the stochastic oscillator explained here is among the best of them. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. 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. 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 Stochastic Oscillator in Forex? The stochastic oscillator can help you to determine when a currency pair is overbought or oversold. Here is How to Use Stochastic Oscillator in Forex? 16 February, AtoZForex – Stochastic is a simple momentum oscillator developed by George C. Lane in the late 1950’s. The oscillator can help you to determine overbought or oversold of the currency pair. Since the traders are using Stochastic over 50 years so it became the mostly use strategy in the Forex market.

How to Use Stochastic Oscillator in Forex. Since there are multiple variations of Stochastic oscillator but we will focus solely on the Slow Stochastic oscillator. Slow stochastic is generally found at the bottom of your chart consists of two moving averages. These moving averages are destined between 0 - 100. The blue line signifies the %K line and the red line signifies the %D line. The %D is an MA of the %K. Momentum changes the directions when these two Stochastic lines cross. Therefore, the trader should check a signal in the direction of the cross when the blue line crosses the red line. Here I am going to tell you the step-by-step guide for using Stochastic Oscillator in Forex trading. However, traders are always observing for ways to improve signals. There are two ways by which you can filter these trades to advance the strength of the signal. Crossovers at Extreme Levels. Normally, a trader won't have any desire to take each signal that shows up. A few signals are more grounded than others. The principal channel we can apply to the oscillator is taking crossovers that happen at extreme levels. Since the oscillator is bound in the range of 0 and 100, overbought is considered over the 80 level.

Then again, oversold is considered underneath the 20 level. Consequently, cross downs that happen over 80 would show a potential moving trend bring down from overbought levels. Filter Trades on Higher Time Frame in Trend’s Direction. The second channel we can hope to include is a trend channel. On the off chance that we locate an extremely solid uptrend, the Stochastic oscillator is probably going to stay in overbought levels for an amplified timeframe giving numerous false offer signals. By then, if Stochastic crosses up from oversold levels, then the selling pressure and the momentum is likely lightened. This gives us a signal to buy which is in arrangement with the bigger trend. Think we missed something? Let us know in the comments section below. 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. 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! Stochastic Oscillator. What is a 'Stochastic Oscillator' The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. Derivative Oscillator. BREAKING DOWN 'Stochastic Oscillator' The stochastic oscillator is calculated using the following formula: %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. The general theory serving as the foundation for this indicator is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low. Transaction signals are created when the %K crosses through a three-period moving average, which is called the %D. History of the Stochastic Oscillator. The stochastic oscillator was developed in the late 1950s by George Lane. As designed by Lane, the stochastic oscillator presents the location of the closing price of a stock in relation to the high and low range of the price of a stock over a period of time, typically a 14-day period. Lane, over the course of numerous interviews, has said that the stochastic oscillator does not follow price or volume or anything similar. He indicates that the oscillator follows the speed or momentum of price. Lane also reveals in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences. This signal is the first, and arguably the most important, trading signal Lane identified. Overbought vs. Oversold. Lane also expressed the important role the stochastic oscillator can play in identifying overbought and oversold levels, because it is range bound. This range – from 0 to 100 – will remain constant, no matter how quickly or slowly a security advances or declines. Considering the most traditional settings for the oscillator, 20 is typically considered the oversold threshold and 80 is considered the overbought threshold. However, the levels are adjustable to fit security characteristics and analytical needs.

Readings above 80 indicate a security is trading near the top of its high-low range; readings below 20 indicate the security is trading near the bottom of its high-low range. Forex Stochastic Oscillator Formula for Day Trading. Any trading platform offers multiple indicators for analyzing a market. Either trend ones or oscillators, they help traders finding places to buy or sell. The Forex Stochastic oscillator is an accurate indicator for both scalping and swing trading. Moreover, the stochastic oscillator formula is simple and easy to use. Trading is a game of probabilities. As long as traders understand there’s no magic formula that works one hundred percent of the times, profits will come. The idea is to find a proper way to make money with the winning trades. Of course, the bigger the winning rate, the better. Risk management or money management plays an important role.

Most of the times, traders face difficult decisions. In theory, it sounds very simple. Every trader knows heshe needs to cut losses asap. Or to let profits run. Everyone agrees with that. Yet, this is a difficult thing to put into practice. The stochastic oscillator comes to help with this decision. As often is the case, retail traders end up losing money despite correctly reading the market. Greed and fear are the worse enemies. You may know where the market goes, but this doesn’t mean you’ll make a profit. Discipline and patience matter the most, while an indicator like the Forex stochastic one comes to help. Its biggest advantage is visibility. Traders see any signals generated and have plenty of time to react. This is especially true if the time frame is big enough. Another plus comes from its characteristics. It is essentially following the market.

The currency pair makes a new high? Chances are, the stochastic oscillator Forex indicator does the same. If not, trading strategies derive from it. What is Stochastic Oscillator? First of all, being an oscillator, it appears at the bottom of a chart. Any oscillator appears in a separate window at the bottom of a chart. This tells much about its usability: to spot fake moves the price may make. Second, it has two lines: the main and the signal line. They go hand in hand on that small window below the chart, and all eyes should be on these two lines. The signal one (the MetaTrader shows it with the red color) is a fast moving average, while the main one is a bit slower.

The default settings show the 5 and 3 periods for the two lines, with the fastest one having the smaller number. While the default scenario uses a simple moving average, any type works: exponential, smoothed, etc. All options work just fine. George Lane, the guy who developed the stochastic indicator Forex traders use, was a smart guy. He wanted to have an indicator that measures the difference between the actual price and the price range over a period of time. And this is exactly what the stochastic oscillator calculation shows. One thing is important here. The default settings are just default settings. By no means, one cannot change them. However, before doing that, keep in mind the two lines will flatten. This will make trading signals difficult, if not impossible to spot. Not to mention, irrelevant. For this reason, it’s best to use it with the default settings.

If you apply it on a regular chart, it will look exactly like the image below. The usual caveat applies here too: the bigger the time frame, the bigger the implications. Stochastic Oscillator Formula. Before discussing the actual formula, we should look at what it means. The indicator travels only in positive territory: between the zero and one hundred levels. You’ll never see values bigger than one hundred or smaller than zero. This just comes from how the stochastic oscillator parameters work. As mentioned above, its formula considers the main and the signal lines. The main line is %K and the signal %D. The actual formula is irrelevant. What matters the most for Forex traders is to know how to read the stochastic oscillator, not the mathematical formula. For math fans, though, this is how the mainline formula looks like: %K = 100(C – L5close)(H5 – L5) where C = the most recent closing price L5 = the low of the five previous trading sessions H5 = the highest price traded during the same 5 day period. The %D line is much simpler: %D = 100 X (H3L3).

Now you know why the oscillator comes with the 5 and 3 values as the default ones: the five and the three day-periods make up the formula. As a rule of thumb, an oscillator’s purpose is to detect a lie. Or a fake move that price might make. Between the price and an oscillator, traders should always trust the oscillator. How come? The answer is straightforward: there are more periods considered, whereas the price shows the current market stance. If one of the two is making a fake move, the price is the one. Hence, the Forex stochastic oscillator settings for day trading work best when traders use them against the current price. Stochastic Oscillator Settings for Scalping. Traders open and close a position based on various things. The most important one is time. To be more exact, the time horizon of a trade gives the type of the trading style used. Therefore, swing traders consider a few hours or even days for a trade. Investors don’t worry about time that much. What they do is they focus on the macro-picture.

For investors, it matters most to be fundamentally right, then quick profits. And then there are scalpers. This is where the average Joe, the Forex retail trader fits into. Retail traders start with a huge disadvantage: their own expectations related to trading. Most of them come to Forex trading for a quick and fast buck. The quicker, the better. The less effort, even better. Trading doesn’t work this way. Or, it may, but is not profitable this way on the long run. Yet, the stochastic oscillator formula is the same for all investors. The only difference comes from the time frame used. Here’s a quick guide for correlating a Forex stochastic strategy with the right time frame, having the time for a trade in mind: – investors use it on the weekly and monthly charts, focusing on the last one – swing traders come down to the daily, four-hour and hourly charts – scalpers typically use the five-minute and lower time frames. The strategies with the Forex stochastic oscillator to be explained here follow George Lane’s intention.

That is, to create an indicator based on a simple formula that helps to spot fake moves. The beauty of this indicator is that all traders can use it. Are you in for a quick buck and scalping suits your personality? Use the stochastic indicator! Is swing trading your thing? How about trying this indicator? Even investors find tremendous value in it. How to Use the Forex Stochastic Oscillator? George Lane wanted multiple things from this oscillator. And, in a way, he did a great job. Any oscillator, in the end, shows overbought and oversold levels. Hence, the first thing to look for is to buy oversold and sell overbought levels. But, an oscillator is more than that.

The focus should always stay on it. When dealing with an oscillator, some traders won’t even look at the actual price. They simply trade the oscillator’s moves more than the ones the price does. Because the idea is to find out fake moves for the actual price, traders look for divergences. To be more exact, divergences between the price and the oscillator. Hence, a great stochastic oscillator strategy is to trade these divergences. Moreover, if the absolute range is between zero and one hundred, can we do something about it? Is there any stochastic oscillator trading strategy derived from this? The rest of this article deals with three ways that show how to use stochastic oscillator. For this, we’re using the default settings, just like George Lane intended. All of them have one thing in common: they consider the cross between the signal and the main line. As always, keep in mind the time frame. The bigger it is, the bigger the implications for every strategy described below. Trading Overextended Levels. In Forex trading, overextended refers to overbought or oversold levels.

Therefore, the standard interpretation of an indicator that shows such levels is the following: buy oversold and sell overbought. The chart below shows the EURUSD hourly time frame. Moreover, this stochastic oscillator trading strategy uses the current prices. This is important as one can test the relevance of it. The stochastic oscillator indicator shows overbought and oversold levels above or below 80, respectively 20. However, keep in mind what was mentioned earlier: the cross between the two lines matter. As such, using the Forex stochastic oscillator this way assumes traders should look for a cross in an overbought or oversold territory. More exactly, above 80 or below 20. Since these are the levels, they give the entries. The idea is to sell on a cross above 80 and stay short until the fast line reaches the 20 level. And then, reverse. Go long on a cross below 20 and stay that way for the fast line to reach the 80 area. This approach of how to read the stochastic oscillator worked like a charm. At least, the EURUSD hourly chart above shows great entries.

However, there’s a catch: it works when the market is in a range. The problem comes from the way the market behaves. While ranges predominate, they will be broken. Eventually! And when that happens, no overbought and oversold level can help your trading account. In trading, there’s a saying: the market can stay in overboughtoversold areas more than a trader stays solvent. That is so true! As a consequence, there must be some other ways of using stochastic oscillator when the market breaks a range. A stochastic oscillator divergence will show the right direction. Moreover, if used with proper riskreward ratios and a disciplined approach, trading is fun. How to Use Stochastic Oscillator Divergences. A divergence forms when the price does something different than the oscillator.

Or, the other way around. In both cases, one is lying, and that one is the price. Hence, traders should focus on the oscillator, rather than the price. Divergences are of two types: bullish and bearish ones. The rule calls for long trades after a bullish divergence and short trades to follow a bearish one. Needless to say, bullish divergences appear at the end of bearish trends, and bearish divergences at the end or bullish ones. Therefore, trading them is risky! Have you ever heard of “catching a falling knife” in trading? If yes, it was invented when traders bought bullish divergences. However, traders are of two types: conservative and aggressive ones. Aggressive traders will always look to buy the absolute low. That is possible but very difficult. How about waiting for a confirmation? Divergences show how to use stochastic oscillator in Forex trading when a decision needs to be made. Have a look at the chart below in order to understand what a divergence is and how the market confirms it. Unfortunately, not everyone waits for a confirmation. That is when trading becomes expensive.

Aggressive traders will argue here that better riskreward ratios derive from being earlier in a trade. As a side note, the reward should be always bigger than the risk. Two, three or even higher multiples are part of a successful trader’s toolkit. In any case, divergences give an educated guess regarding the future price direction. If anything, they show the trend hesitation. The oscillator’s ability to diverge from price tells much about the undergoing momentum or the current move’s lack of strength. As a tip, when looking for divergences, try to find two higherhighs or lowerlows that the oscillator doesn’t confirm. Crossing the Middle Range. The example above shows what conservative traders should look at before entering a trade. The bearish divergence gets confirmed by price moving below the lowest value of the previous swing. That is when selling should take place. After all, when dealing with your own money, you want to take all the precautionary measures possible. Besides the two strategies from above, there’s another way that shows how to use stochastic oscillator in Forex. The key to this is to use a trick given by the stochastic oscillator formula. How about splitting the range?

The entire range matters here, not the one between overbought and oversold areas. Having said that, the middle point between one hundred and zero is fifty. We can edit the indicator by right-clicking on the chart area, select it from the Indicators List and choosing the Levels tab. Simply add the 50 value, select the color and style, and it will appear on the oscillator’s window. The idea behind this strategy is simple: use the 50 level as a continuation pattern. It means we should buy when the level gets crossed from below and sell when the oscillator comes from above. Such a simplistic approach fails more than succeeds. But this doesn’t make it unprofitable. Whit risk-reward ratios bigger than 1:2 or 1:2.5 the account grows nicely. The targets for this Forex stochastic oscillator strategy differ with the time frame. On a five-minute chart, smaller targets come with bigger volume. The opposite is true on bigger time frames: volumes drops on behalf of a bigger target. Not once, traders fall prey to false expectations. Everyone looks for the holy grail in trading: find a strategy that works all the time.

Instead, people should focus on a strategy that works MOST of the times. That makes money! Video Example of the Stochastic Oscillator. And now you have the wonderful opportunity to see the Stochastic Oscillator in action for free. Below you will find a video that shows one of my trades with the Stochastic. I managed to match an overbought Stochastic signal with a price bounce from a bearish trend line. Therefore, I shorted the GBPUSD on the assumption that the price is about to decrease. Meanwhile, a Double Top chart pattern was confirmed on the chart, which gave additional support for my short trading decision. See the video for free by entering your details! This article used the standard stochastic oscillator settings to show ways to trade with it. However, the best stochastic settings for day trading are the ones that consider risk management.

In trading, this is more important than any trade setup. If you don’t understand the risk, you don’t know the reward. Both of them matter in the end. This is the idea of any oscillator, no matter its name. Even though overbought or oversold levels aren’t specified, it is easy to build them. Likewise, divergences show the right direction when used with any oscillator. If that is the case, what is stochastic oscillator showing differently than other indicators? What makes it so special



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