Stochastic Forex System - Combining Stochastics with Different Types of Indicators in Forex
This lesson should be called: Combining Stochastics with other Trading Indicators, but Stochastic System sounds real nice.
Stochastic indicator can be combined with other trading indicators to develop a tradingtrade system. For our examples we will combine it with:
- RSI
- MACD
- MAs Indicator
Example 1: Stochastic System
Sell Signal Generated using Stochastic System
From our system the sell signal gets generated when:
- Both Moving Averages are heading down
- RSI is below 50
- Stochastic heading downwards
- MACD heading downward below center line
The sell signal was generated when all these forex rules were met. The exit forex signal gets generated when a signal in the opposite market trend direction is generated i.e. When the trading indicators reverse.
The good thing about using such a system is that we are using different types of indicators to confirm the trade signals and avoid as many whipsaws as possible in the process.
- Stochastic - is a momentum oscillator technical indicator
- RSI- is a momentum oscillator technical indicator
- MAs Trading 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 signals is much better than relying on just a single forex indicator. The forex trading technical indicator combinations reinforce each other, and cancel out false whipsaw forex signals.
A trend following technical indicator helps one to see the overall picture, while using more than one momentum technical indicator gives better & more reliable entry and exit points for trading forex.
The forex indicators combinations & their signals help to decipher a lot of the market activity.
Example 2: Stochastic System
Buy Trade Signal Generated using Stochastic 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 technical indicators such as MACD indicator a forex trader could have avoided the whip saw, even the MACD technical indicator had not given a crossover signal although it was very close to the zero center-line level, at the same time the gradient at which moving averages technical 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's a skill that takes some time but after some time you can spot whipsaws from a mile away.
One tip is that as long as MACD indicator 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 indicator 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 Technical indicator will give the fastest forex signals which are prone to whipsaws. This is why stochastic indicator is best combined with other indicators & the forex signals traded are confirmed by another one or two other indicators.
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