Learn Stochastic Indicator Trading Strategy
This learn tutorial will talk about how to come up with a strategy that is based on the stochastic indicator. This stochastic indicator strategy will be used by traders to trade trending markets. This strategy is simple to trade with and 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 downwards 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(MA) then the market trend is considered as a downwards bearish trend.
Stochastic Indicator Trading 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 gold trader will use the over-bought and oversold levels to detect when to open trade positions. Oversold level is the 20 mark on the stochastic & the over-bought level is the 80 level mark on the stochastic oscillator indicator.
Upwards Trend - in an upward trend the trader will wait for stochastic technical indicator to pull-back and move downward upto the over-sold levels. This will mean that there's a short-term market retracement & a xauusd/gold trader will wait for the best opportunity to buy after this pull back. Once the stochastic oscillator gets to the over-sold 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 & starts moving upward.
Downward Trend - in a downwards trend the trader will wait for stochastic technical indicator to retrace upwards & move upwards upto the over-bought levels. This will mean that there is a short-term market retracement & a xauusd/gold trader will wait for the best opportunity to sell after this upward retracement. Once the stochastic oscillator reaches the over-bought 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 and odds of the trader becoming more profitable because the transactions will be opened at the optimum point - that is after a price pull back. This trading setup will increase the risk reward ratio of the trade positions because the chances of the trade positions retracing much further beyond these points are minimized and this is because the price is already oversold in an upward trending market or already overbought in a downward trending market.
A trader should then set their stop loss orders a few pips below where they opened a buy trade position or a couple of pips above where they opened a sell trade position. The trader will then determine where to take profit orders 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.
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