Learn Stochastic Strategy

This learn tutorial will talk about how to come up with a strategy that is based on the stochastic indicator. This stochastic strategy will be used by traders to trade trending markets. This strategy is simple to trade with & simple to follow. Using the stochastic indicators traders can use this indicator to come up with a strategy that will be used to identify trends.

Trend

The different techniques used to determine & identify market trends.

·An upward trend is when the market is heading in an upwards general direction and the price keeps making higher highs and higher lows.

·A downward trend is when the market is heading in a downward general direction and the price keeps making lower lows & lower highs.

This is the first thing to look for when determining the market trend, a trader can then use another method to confirm the trend. For example a trader may use a trend line & if the trend line direction is up the trend is then upward but if the trend line direction is down then the trend is downward.

A trader can also use the 200 day moving average to determine the market trend. If the price is above the 200 day moving average then the trend is considered as an upwards bullish trend. If the price is below the 200 day moving average then the market trend is considered as a downward bearish trend.

Stochastic Strategy

After determining the trend the trader will then use the stochastic indicator to determine where to open a buy or a sell trade. For this strategy a trader will use the overbought and oversold levels to detect when to open trades. Oversold level is the 20 mark on the stochastic and the overbought level is the 80 mark on the stochastic oscillator.

Up-wards Trend - in an upward trend the trader will wait for stochastic indicator to pull back and move downward upto the oversold levels. This will mean that there is a short term market retracement & a trader will wait for the best opportunity to buy after this pullback. Once the stochastic oscillator gets to the oversold level it will not stay there for long because the trend is upward and this will only be a temporary price pull-back.

A trader will open a buy trade once the stochastic oscillator leaves the oversold level and starts moving upwards.

Downwards Trend - in a downward trend the trader will wait for stochastic indicator to retrace upwards & move upwards upto the overbought levels. This will mean that there is a short term market retracement & a trader will wait for the best opportunity to sell after this upwards retracement. Once the stochastic oscillator reaches the overbought level it will not stay there for long because the market trend is downward and this will only be a temporary price pull back.

A trader will open a sell trade once the stochastic oscillator leaves the overbought level & starts heading downward.

A trader can use this strategy to find the best place where to open a trade after a price pull back. This will increase the chances of the trader becoming more profitable because the trades will be opened at the best point - that is after a price pull back. This will increase the risk reward ratio of the trades as the chances of the trades retracing further after these points are minimized because the price is already oversold in an upwards trending market or overbought in a downwards trending market.

A trader should then set their stoploss orders a few pips below where they opened a buy trade or a few pips above where they opened a sell trade. The trader will then determine where to take profits based on a favorable risk reward ratio, or they can set the take profit at a specified number of pips based on the rules of their plan.