Forex for a trader
Indicator stochastic oscillator divergence forex factory

Indicator stochastic oscillator divergence forex factoryStochastic Divergence - indicator for MetaTrader 4. Divergence based on a standard Stochastic with Alert and language selection. The Stochastic is not required to be present on the chart. However, if a standard Stochastic is attached, the divergence lines will be drawn both on the chart and in the indicator window, and the indicator will use the Stochastic settings. The solid line shows the classic divergence, the dotted line displays the reverse divergence. It is possible to change the line color (the ColorBull and ColorBear variables), and also set the output mode and language for a message when divergence occurs. MACDRSI Divergence Indicator. An intelligent Metatrader divergence indicator that will tell you when to place a trade. It runs in the background and can send trade alerts either by email, SMS or display them in the trading terminal. The indicator locates divergences ; that is situations where there’s a temporary disconnect between an oscillator such as MACD and the market price. In typical cases the MACD (or whichever oscillator is chosen) is moving against the price over a short period. These create trading opportunities. Divergence is a favorite strategy among technical traders. This is because of its clean signal and ability to locate high probability market turning points. Figure 1 below shows an example. This tool uses a dynamic sampling method so that low probability divergence trades are filtered out in the early stages. The remainders are checked against a number of other criteria to maximize the success rate.

Buy signals are generated only where the market is deeply oversold and sell signals where the market is deeply overbought. These combined with situations where momentum is slowing are often seen where a market correction is building. The indicator makes trade suggestions which you can act on or ignore. The trade suggestions are displayed on the chart. But if you don’t want to watch the screen all day you can receive instant alerts by: Email SMS – Using push notifications Pop up alerts. The indicator doesn’t place trades for you. However, if you are looking for a fully automated system the template provided will let you easily hook it up to your own expert advisor. The indicator has a number of configurations to allow it to work with any instrument, timeframe or trading system. The most important of these is the choice of oscillator. A selector will set the oscillator from the following choices: MACD – Moving Average Convergence Divergence RSI – Relative Strength Index Stochastic – Stochastic oscillator OsMA – Moving Average of Oscillator CCI – Commodity Channel Index ADX – Average Directional Index. These oscillators are all built into Metatrader 4 and 5 so there aren’t any custom tools to install.

For a more information please see the technical guide. Compatible with Metatrader 4 and Metatrader 5. The Divergence Trade: Finding Reversals Using MACD & RSI. In my last post I talked about a strategy for trading divergence events between different markets. In this post I’ll look at the more commonly used method called oscillator divergence. This is a technical strategy and to use it you’ll just need an oscillator such as MACD, stochastic or RSI. What is divergence ? Divergence highlights places where momentum is slowing and is likely to reverse. The basic idea is to look for inconsistency between the price and an oscillator. Clearly price is reacting in real time. The oscillator however is based on price momentum and is working from recent history. In the strategy described here I always take cue from the oscillator so this dictates the direction of the trade. To experiment with this strategy yourself, you can freely download my indicator and try it out. The rules I use are simply as follows: These two cases are shown in Figure 1 below. I don’t apply any other classifications. With this method I always follow the oscillator. That is, buys take place when the oscillator is oversold and sells occur when it is in the overbought region.

I also always match tops with bottoms. That is, if your trend line on the price chart connects low points, then your trend line in the oscillator chart should also connect lows. If your line on the price chart connects highs, then your oscillator line should also connect highs. Regular and Hidden Divergence: Is there a difference? Some teaching websites talk a lot about regular and hidden divergence. Hidden divergence is basically an extra classification based on which direction the connecting lines are moving. Personally I think this complicates the trading rules and I don’t use it. In the end don’t get hung up on classifications. Use what works for you and the market you are trading. Detecting Divergence Events: In Detail. Let’s look in detail at how to detect these types of events. All oscillators have a range of values. When the oscillator is at one of these extremes it’s said to be either overbought or oversold. So the first step in the detection process is to look at cases where the oscillator is firmly in overbought or oversold territory. The range of an oscillator will vary significantly at different points in the chart.

So I usually define dynamic thresholds for overbought and oversold rather than using one setting. In my examples I’ve used a sampling size of 50 bars and taken the maximum and minimum values of the oscillator over that range. I then set a threshold at a percentage of that, say 70%. This setup is shown in Figure 2. Once you’ve established the overbought and oversold levels within the local chart section, look for cases abovebelow these thresholds. Anything outside of these limits is thrown out. Take Figure 2 as an example. I’ve set the threshold for overbought and oversold levels at 70% of the maximumminima within the sampling area. The lines shown on the figure mark the cut-off levels. Next I look at the oscillator’s peaks or troughs that are within my threshold according to my trading rule. When overbought, I look for cases where the oscillator’s peaks are falling. In Figure 2 above, the dark blue line in the lower graph connects the peaks. To confirm a point really is a peak, I have to wait a certain number of bars to see which direction the line will move in next. If the line were to move up, then I know that this isn’t a peak. In this example the line does indeed move down and so the point is confirmed as being a maxima. Next check the price and make sure the direction is moving against that of the oscillator.

So as in the example above when the oscillator is overbought and falling, I look for cases where the price is still rising. These define my sell signals. The buy side signal is simply just the opposite of this. This is shown in Figure 3. In this case the oscillator is oversold and rising, but the price is still falling, so this generates a buy signal according to my trading rule. When trading divergence remember that there is always a certain time lag before the trade signal can be generated. The reason for this is that you can only ascertain that a peak or trough has been reached in the oscillator after a certain number of bars. In the example above I used 2-bars for the detection. So I waited for 2 bars to complete before classifying the indicator as in a maxima or minima. This means there’s a lag of at least 2 candles on every detection.

And this has to be added to the intrinsic lag of the indicator. Latency does limit profits in that part of the price move will already be underway by the time the oscillator reacts and the divergence signal is detected. Latency can be seen as the “cost paid” for using averaging and reacting to a more complete signal. It does reduce the number of noisy or false positive signals, though these do still occur as explained below. Dealing with False Positives. As with any kind of technical signal, false positives are expected and have to be dealt with. If your trading program is going to rely heavily on divergence my advice is to use a few different inputs to ensure you enter the highest probability trades and avoid those with low or marginal outcomes. Figure 4 shows a typical problem case that’s common when trading divergences. The first buy signal is made when the oscillator appears to have made a local minima (reached a trough). This is outlined with the lower red circle. The red circle is neither a maxima nor a minima but an inflection point that we would rather not trade on. You have to be wary of this because “text book” divergence examples are often cherry picked with hindsight and would not be detectable in real time. With the benefit of hindsight the detection of the peaks and troughs is easy.

But in real trading, at any instant there is no way of knowing that the current bar in the chart is an inflection or a minima. In fact the price doesn’t change direction but continues to descend sharply. This in turn causes the oscillator to fall further. The second, more accurate buy signal is generated at the later point when in fact the price does respond and begin to rise again. There are two methods to try to filter these false positives. Though both have some drawbacks. Firstly you can increase the sampling area of detector. In other words, filter out the cases where the overbought or oversold level is not extreme. This will help to reduce the number of false cases. But it comes at a cost of detecting fewer overall divergence events. This needs to be weighed up against the strategy being implemented. Secondly you can increase the number of confirmation bars that you use to check the extrema points in the oscillator. For example, in the above if I’d used a window of 5 bars, the above false positive would have been avoided because by that time the oscillator starts to fall again. This will increase the lag in the detector but it can improve accuracy. Here are a few case studies picked out with the help of the OSC divergence indicator.

This first example shows a near perfect scenario. I’ve applied the above trading rules to USDCAD. I’ve used the four hour (H4) chart here as this timeframe tends to produce more reliable signals than do the shorter ones. The following settings were used: Oscillator: MACD Overboughtoversold threshold: 30% Minmax bars: 14100. For MACD I used the following settings throughout: Fast EMA:15, Slow EMA:30, SMA:9. As Figure 5 shows, all cases except trade 3 result in decent profit potential. Trade 3 is a mixed case. It is a false positive in that the price continues to fall. However the trade would still be profitable because the price does indeed rise shortly afterwards. This next example on NZDUSD shows some false positives. Trades 2, 3 and 5 generate good openings while trades 1 and 6 are mixed cases. These might scrape a small profit but in hindsight we would probably prefer not to trade these. Trade 4 is an outright loser. If this trade were taken, it would be in drawdown (up to 300 pips) for a few weeks before it could eventually be closed with a small profit. Trades 7 and 8 also falsely call the top of the trend which in fact continues up strongly for some time. To filter some of these false positives I’ve increased the sampling area from 50 bars, to 2000 bars.

The result is shown in Figure 7 below. Now some of the false positives have been removed, though as you can see the overall number of trades is reduced. This next example shows divergence in action on a shorter timeframe. Finally in Figure 9 I’ve replaced the MACD oscillator with the RSI. The RSI generates some good entries which are missed when using MACD in Figure 8. These are marked 1, 2, 4 and 6 below. Using RSI also misses the false positive between trades 1 and 2. It does however create some additional false positives at 3 and 5. Strengths and Weaknesses of Divergence. Oscillator divergence is a good way to trade turning points in trends, though it helps to be aware of the strengths and weaknesses of this method. The first weakness as I said above is due to the time lag. All oscillators are averaging systems of one sort or another. This introduces some inherent delay. Secondly the detection of the maxima and minima in the oscillator introduces an additional lag. The second weakness is that of false positives or false reversals. These occur when the oscillator is in an overboughtoversold state and is signalling a turn but this fails to emerge at the predicted time. This is quite common. There are a few ways I discussed to address this. The thing to remember with oscillators is that they are just another representation of the price line. There isn’t anything magical in the oscillator window.

All information is derived from the price with a time lag. If you look carefully at the price chart you will usually see the reason for the change in the oscillator – usually changing momentum. Divergence is a valuable technique to keep in your toolbox. But it pays to get confirmation of the market direction using other means as well: In particular: Using a pair of alternative oscillators such as RSI and MACD is helpful. Look for clues to fake topsbottoms and ensure you are not entering at one of these Examine the trend carefully using other criteria; e. g. support and resistance Look at related markets for trend cues. Intermarket studies can tell you if the leader market is trying to break away in a new direction or if it’s resuming an existing trend. Don’t forget the fundamentals. Here is the link to the indicator used for the above examples: Understanding the Stochastic Oscillator and Divergence. There are many technical indicators traders use, and among the most common is the Stochastic Oscillator. There are multiple trading methods involving this indictor, including using it to spot divergences . Spotting a divergence can alert to you potential trend reversals, and highlight underlying strength or weakness which may not be easily seen on the price chart.

First, let’s take a look at what the Stochastic Oscillator is, and how it is composed, so when you trade with it you’ll know what it’s telling you. Then we’ll delve into divergence and how to use it. I’ll also touch on two other popular stochastic trading strategies, the overboughtoversold and the cross-over . Quite a mouthful, but the concept is quite simple. The indicator moves between 0 and 100 and reflects where an asset’s price is relative to a given time frame. If the indicator is near 0, the price is very near the low of the time frame you’re looking at. If the indicator is near 100, the price is very near the high price of the time you’re looking at. This indicator is quite customizable, since it has three main variables you need to select, as well as some additional options depending on which charting platform you use. Figure 1. Stochastic Oscillator – MetaTrader 4. The graphic above shows what you can expect (or something similar) when you add a Stochastic Oscillator to your chart. %K is the number of time periods you want to use in the calculation. If you use a 1 minute chart to trade, you may want to set this to 5 or 7, and therefore the indicator will be based on the last 5 or 7 minutes respectively. Above it has been set to 5. “Slowing” allows you to smooth out the fluctuations of %K. Set it to 1 and your %K line on the indicator will jump back and forth rapidly. Set it to 3 and it will gyrate at a slower pace. Which you choose will depend on how active of a trader you are. Above it has been set to 3. %D is a moving average of %K. This once again smooths out the %K line slightly. %D is usually shown as a dotted line, which tracks the %K line on the indicator. In the graphic above, 3 has been selected for this variable. Therefore, %D will be a 3 period moving average of %K. The Price Field allow you to select which prices will be used in the stochastic calculation. In the example above the HighLow has been chosen to capture all the price data in the bar. Alternatively, you can choose to use the closing price. The final option is to choose which type of moving average (MA) you’ll use. Using a simple moving average is the most common method, but you can also choose between exponential, smoothed or weighted moving averages.

The different averages respond in your own way to price movements, and therefore, some knowledge of moving averages will help in determining which to use. Stick with the Simple MA if you are unsure which to use. Figure 2 shows a EURUSD Stochastic based on the selected criteria above. Figure 2. EURUSD with Stochastic. Source: Oanda – MetaTrader. Now that the stochastic is set up, you can start to look for divergence. A divergence occurs when the indicator doesn’t move in-line with price. For example, the price makes a new high, but the stochastic fails to reach a new high. Or, price makes a new low, but the stochastic fails to make a new low. The former is a case of bearish divergence, because it signals potential weakness, and the latter is a case of a bullish divergence because it indicates potential strength. When a divergence occurs, it should put you on guard for a potential change in price direction. Although, divergence is not a timing indicator; it may take some time for a reversal to occur following a divergence. Therefore, don’t trade just on divergence . When you have a bearish divergence, wait for the price to break lower before going shortbuying puts. Figure 3 shows the price making new highs, but the stochastic is not–a bearish divergence indicating a reversal could be coming soon, and it does. Figure 3. Bearish Divergence Example.

Source: Oanda – MetaTrader. When you have a bullish divergence, wait for the price to break higher before buyingbuying calls. In figure 4 below the price continues to make lower lows, but the stochastic does not. This is a bullish divergence indicating a reversal higher could be forthcoming, and the EURUSD did bounce. 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. Stochastic divergence. The indicator is an extension of the indicators shown in codebase. mql4ru5117 (author ViDan888), where all details of application. Added ability to show the direction of the arrow with the divergence, enable and disable these ads, as well as enable disable the drawing of lines on the chart. Forex Indicators Download – Instructions. Stochastic divergence is a Metatrader 4 (MT4) indicator and the essence of the forex indicator is to transform the accumulated history data. Stochastic divergence provides for an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye. Based on this information, traders can assume further price movement and adjust their strategy accordingly.

How to install Stochastic divergence. mq4? Download Stochastic divergence. mq4 Copy Stochastic divergence. mq4 to your Metatrader Directory experts indicators Start or restart your Metatrader Client Select Chart and Timeframe where you want to test your indicator Search “Custom Indicators” in your Navigator mostly left in your Metatrader Client Right click on Stochastic divergence. mq4 Attach to a chart Modify settings or press ok Indicator Stochastic divergence. mq4 is available on your Chart. How to remove Stochastic divergence. mq4 from your Metatrader 4 Chart? Select the Chart where is the Indicator running in your Metatrader Client Right click into the Chart “Indicators list” Select the Indicator and delete. Download Metatrader 4 Trading Platform: Free $30 To Start Trading Instantly No Deposit Required Automatically Credited To Your Account No Hidden Terms. Forex Indicators Download below: Stochastic Divergence Metatrader 4 Indicator. This indicator shows divergences between the currency price and the Stochastic Oscillator in a separated window below the main chart.

It also provides buy and sell signals based on positive and negative divergence between price and indicator. It can be used on all forex pairs and timeframe’s. Trading Signals. BUY: Wait for a blue arrow to appear on the chart. SELL: Wait for a red arrow to appear on the chart. Use in conjunction with trend indicators. Trade in the direction of the overall trend. Download. Configurable Indicator Options. KPeriod, DPeriod, Slowing, DrawArrows, DrawPriceLines,… EURUSD 1 Hour Chart Example. . codebase. mql4ru5117 ( ViDan888), . ?? , , . MT4 Forex – . 4 (MT4) - . , . , . Forex Metatrader 4 : $30 , . divergence.

mq4? divergence. mq4 divergence. mq4 Metatrader Metatrader 4 , 4 “ ” Metatrader 4 divergence. mq4 Stochastic divergence. mq4 . divergence. mq4 Metatrader? , Metatrader 4 “ ” . , : MACDRSI Divergence Indicator. An intelligent Metatrader divergence indicator that will tell you when to place a trade. It runs in the background and can send trade alerts either by email, SMS or display them in the trading terminal. The indicator locates divergences ; that is situations where there’s a temporary disconnect between an oscillator such as MACD and the market price. In typical cases the MACD (or whichever oscillator is chosen) is moving against the price over a short period. These create trading opportunities. Divergence is a favorite strategy among technical traders.

This is because of its clean signal and ability to locate high probability market turning points. Figure 1 below shows an example. This tool uses a dynamic sampling method so that low probability divergence trades are filtered out in the early stages. The remainders are checked against a number of other criteria to maximize the success rate. Buy signals are generated only where the market is deeply oversold and sell signals where the market is deeply overbought. These combined with situations where momentum is slowing are often seen where a market correction is building. The indicator makes trade suggestions which you can act on or ignore. The trade suggestions are displayed on the chart. But if you don’t want to watch the screen all day you can receive instant alerts by: Email SMS – Using push notifications Pop up alerts. The indicator doesn’t place trades for you. However, if you are looking for a fully automated system the template provided will let you easily hook it up to your own expert advisor. The indicator has a number of configurations to allow it to work with any instrument, timeframe or trading system. The most important of these is the choice of oscillator. A selector will set the oscillator from the following choices: MACD – Moving Average Convergence Divergence RSI – Relative Strength Index Stochastic – Stochastic oscillator OsMA – Moving Average of Oscillator CCI – Commodity Channel Index ADX – Average Directional Index. These oscillators are all built into Metatrader 4 and 5 so there aren’t any custom tools to install. For a more information please see the technical guide.

Compatible with Metatrader 4 and Metatrader 5. 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? 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.



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