Stochastic Forex System - Combining Together Stochastics with Different Types of Indicators in Forex
This lesson should be called: Combining Stochastic Oscillator with other Trading Indicators, but Stochastic System sounds real nice.
Stochastic can be combined with other indicators to develop a trading strategy. For our illustrations we will combine it together with:
- RSI
- MACD
- MAs Moving Averages Indicator
Example 1: Stochastic Oscillator System
Sell Signal Generated using Stochastic Oscillator Trading System
From our system sell signal is generated/derived when:
- Both MAs are heading down
- RSI is below 50
- Stochastic heading downwards
- MACD heading downward below center line
The sell signal was derived & generated when all the forex rules were met. The exit forex signal is derived/generated when a signal in the opposite market direction is derived & generated i.e. When the trading indicators reverse.
The good thing about using such a system is that we're using different types of indicators to confirm the trade signals and avoid as many whipsaw signals as possible in the process.
- Stochastic - is a momentum oscillator technical indicator
- RSI- is a momentum oscillator technical indicator
- MAs Moving Averages Indicator- is a market trend following fx indicator
- MACD- is a price trend following forex indicator
It's very useful to combine more than one forex indicator, as a combination of trading signals is much better than relying on just a single forex indicator. The forex trading indicator combinations re-inforce each other, and cancel out false whipsaw forex signals.
A trend following technical indicator helps a trader to see the over-all picture, while using more than one momentum indicator gives and generates better and more reliable entry & points to exit trading forex.
The forex indicators combinations & their signals help to decipher a lot of the market activity.
Example 2: Stochastic Oscillator System
Buy Signal Generated using Stochastic Oscillator Trading System
For this example the fx trend is clearly upward, but at some point there were a few forex whipsaws generated by the stochastic oscillator trading indicator, can you spot them? - So the question is how can one avoid trading these forex whipsaws?
Well, the answer is that by checking-on the other indicators such as MACD a forex trader could have avoided the whip saw, even the MACD had not given a crossover signal although it was very close to zero center-line level, at the same time the gradient at which moving averages indicators turned was not so sharp as to warrant a decisive forex market trend reversal. Well the thing is that it’s not so obvious when it comes to recognizing forex market whipsaws: it is a skill which takes some time to master and learn but after a while you as a trader can spot whipsaws from a mile away.
One tip is that as long as MACD is above zero center line even if the MACD lines are moving downward then the trend is still upwards. As you can see from the above example MACD never went below zero line & afterwards the upward trend continued with the MACD trade indicator maintaining above Zero line & continuing to move upward.
During ranging forex markets Stochastic Oscillator will give the fastest forex signals which are prone to whipsaws. This is why stochastic indicator is best combined with other indicators and the forex signals traded are confirmed by another one or two other indicators.
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