Learn Forex Stochastic Strategy
This tutorial will talk about how to come up with a trading 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 and simple to follow. Using the stochastic oscillators traders can use this indicator to come up with a trading strategy that will be used to identify trends.
Forex Trend
The different techniques used to figure out & identify market trends.
·An upward trend is when the market is moving in an upward general direction and the price keeps making higher highs and higher lows.
·A downward trend is when the market is moving in a downward general direction and the price keeps making lower lows and lower highs.
This is the first thing to look for when determining the trend, a trader can then use another method to confirm the market trend. For example a trader may use a trend-line and if the trend-line direction is up the market trend is then upward but if the trend-line direction is down then the trend is downwards.
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 trend is considered as a downwards bearish trend.
Stochastic Trading Strategy
After determining the trend the trader will then use the stochastic indicator to ascertain where to open a buy or a sell trade. For this strategy a trader will use the overbought & oversold levels to detect when to open trades. Oversold level is the 20 mark on the stochastic & the overbought level is the 80 mark on the stochastic oscillator.
Upwards FX Trend - in an upwards trend the trader will wait for stochastic indicator to pull back & move downwards up to the oversold levels. This will mean that there is a short term market retracement and a trader will wait for the best opportunity to buy after this pullback. Once the stochastic oscillator reaches the oversold level it will not stay there for long because the market 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 heading upward.
Down-wards Trading Trend - in a downward trend the trader will wait for stochastic indicator to retrace upwards & move upwards up to the overbought levels. This will mean that there is a short term market retracement and a trader will wait for the best opportunity to sell after this upward retracement. Once the stochastic oscillator gets to the overbought level it will not stay there for long because the trend is downwards & this will only be a temporary price pull back.
A trader will open a sell trade once the stochastic oscillator leaves the overbought level and starts heading downward.
One 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 downward 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 forex plan.
