stochastic forex strategy
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Stochastic forex strategy

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The good news is that a dual stochastic forex trading system can produce excellent results. When used with the appropriate parameters, a system programmed to monitor dual stochastic indicators can signal when the price of a forex pair is trending yet overextended during a period of short-term retracement.

This dual stochastic strategy focuses on trading when the two indicators are showing extreme opposite values. When both the fast and slow stochastics are at or near the designated limit values, it signals a trading opportunity. I use my mechanical trading system to watch for such conditions, and enter a trade when the price is about to revert back to the continuation of that trend.

The first basic stochastic oscillator was developed in the late s by financial analyst Dr. George C. Stochastics are based on the idea that during an uptrend prices will stay at or above the closing price of the previous time period. Likewise, during a downtrend prices will stay at or below the closing price of the previous time period. This easy-to-calculate oscillator was one of the very first indicators used by technicians searching for insight into price moves. When he first developed this concept, Dr.

Lane advocated the use of divergent and convergent trendlines drawn according to stochastics. And, during the earliest use by Dr. Lane and others, stochastic oscillators were usually used with other tools such as Elliot Waves and Fibonacci retracements for best timing. Part of the reasoning behind stochastic indicators is that a forex price has a tendency to close near the extreme of its recent price range before a turning point.

The values are plotted on a chart as one or more bands which oscillate around an axis or between a set of limit values. Mechanical trading systems and expert advisors make it easy to set up forex trading programs that incorporate stochastic indicators.

There are three general types of stochastic oscillator indicators used in forex trading: Fast, slow and full. During the earliest use of stochastics for trading, Dr. The most commonly-used values of N used for single, basic stochastics are time-periods of 5, 9, or 14 units.

Many traders set N at 14 time-periods in order to represent a sufficient data sample for meaningful calculations. You can experiment with a different number of periods, and this may affect the results of the strategy. Of course, for my dual stochastic strategy as outline below in this article, I use two different sets of time periods.

As indicated above, the classic stochastic calculations are based on a simple moving average SMA. However, for the dual stochastic strategy described below, I also use an additional exponential moving average EMA as a separate confirmation indicator. In contrast to the basic single-stochastic indicators described above, a dual stochastics strategy provides a greater number of winning trades.

My dual stochastic forex trading strategy is based on combining together a fast and slow stochastic and waiting for opportunities when the two different indicators are at extreme opposites. Or, as an alternative, you could confirm signals by using the middle band of the Bollinger bands. I combine both of the stochastic oscillators in the same window in the MetaTrader chart.

Then enter your settings in the dialog box. The trading rules are easy. The mechanical trading system is programmed to wait for strongly-trending price, and watch for the stochastics to be at extreme opposites, near the limit values.

On the other hand, a bigger n will result in a stochastic that reacts slowly to price changes, but the trading signals generated will be more reliable. The two stochastic lines oscillate between 0 and The values denote oversold and overbought conditions in the market, respectively.

George Lane pointed out that in the market, price follows momentum. The above interpretation is ideal in ranging markets. Traders must be wary of stochastic signals in markets that trend strongly because indicator values can stay for prolonged periods in overbought and oversold conditions.

Traders also watch the stochastic centreline value 50 because it tells whether the prevailing trend is momentous or not. A bullish trend is qualified as momentous if the stochastic reading is above 50; whereas a bearish trend is qualified as momentous if the stochastic reading is below Beyond the indicator reading, traders can also watch out for stochastic divergences to pick out lucrative trading opportunities in the market.

The stochastic indicator is at its best when combined with other technical analysis tools. Here are some of the best combinations:. The stochastic indicator has become so popular because it is a good trading tool. In addition to being easy to read, it is also highly accurate, and many traders have benefitted from the information gained by adding the stochastic indicator to their charts.

Over the years there have been a number of variants that have been developed to improve on the original stochastic indicator, but for the most part traders can remain with the original and feel confident that it will be both reliable and accurate. Both the stochastic indicator and the relative strength index RSI are momentum oscillators.

That makes them quite similar in their objective, with both being used to identify and forecast market trends. Even though they have a similar objective, each arrives there in a quite different way. The stochastic indicator works based on the assumption that closing prices should be moving in the same direction as the underlying trend. The RSI uses the velocity of price movements to determine when price is overbought or oversold.

Both are useful, although the stochastic indicator tends to be better in sideways and choppy markets, while the RSI is preferred for trending markets. The stochastic indicator and the MACD are both oscillators, and have a similar objective, although they arrive at that objective in different ways. Because of this the stochastic indicator tends to be better in sideways, ranging markets and the MACD tends to be a better indicator in trending markets. To get an even better signal the two indicators can be combined.

It has been noted that if there is a stochastic crossover followed shortly after by a MACD crossover it is a very strong signal that a trend is forming. See a trading opportunity? Open an account now! None of the content provided constitutes any form of investment advice. Still don't have an Account?

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A modern sniper elite trader only pulls the trigger on a trade when he is certain he can pull a winning trade. Our team at Trading Strategy Guides is developing the most comprehensive library of Forex trading strategies. Our goal is to help turn your trading around.

Our favorite time frame for the Best Stochastic Trading Strategy is the minute chart. This is because we have taken the time to backtest the best Stochastic Trading Strategy. We also tested the minute TF over and over again. The stochastic strategy evolved into being one of the best stochastic strategies. Despite the stochastic indicator being a very popular indicator among traders, they have been using it the wrong way.

Our team at Trading Strategy Guides. We have your back. For every Forex strategy, we make sure we leave our own signature and make it simply the best. You can also read our best Gann Fan Trading Strategy. Before we move forward, we must define the indicators you need for day trading with the best Stochastic Trading Strategy and how to use stochastic indicator.

Stochastic Indicator: This technical indicator was developed by George Lane more than 50 years ago. There is a reason why this oscillator survived for so many years. The Stochastic indicator is a momentum indicator that shows you how strong or weak the current trend is. It helps you identify overbought and oversold market conditions within a trend. The stochastic indicator should be easily located on most trading platforms. Indicators, like the MACD indicator, are more suitable for swing trading.

We decided to share this with our trading community recently. Another reputable oscillator is the RSI indicator, which is similar to the Stochastic indicator. We chose it over the RSI indicator because the Stochastic indicator puts more weight on the closing price. This is the most important price no matter what market you trade. This strategy can also be used to day trade stochastics with a high level of accuracy.

The stochastic oscillator uses a quite complex mathematical formula to calculate simple moving averages:. The mathematical formula behind this method works on the assumption that the closing prices are more important in predicting oversold and overbought conditions in the market. Based on this assumption the Stochastic indicator works to give you the best trade signals you can possibly find. Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules.

This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. The multiple time frame concept is important because it can give you a more robust reading of the current price action and more it can help you better time your entry and exit points.

The minute chart is the best time frame for day trading because is not too fast and at the same time not too slow. It is said that the market can stay in overbought and oversold condition longer than a trader can stay solvent. So we want to take precautionary measures, and this brings us to the next step on how to use the stochastic indicator.

Right now is the time you should switch your focus to the price action, which brings us to the next step of the best stochastic trading strategy. A Swing Low Pattern is a 3 bar pattern and is defined as a bar that has one preceding and one following bar with a higher low. Here is how to identify the right swing to boost your profit. So, after following the rules of the Best Stochastic Trading Strategy , a buy signal is only triggered once a breakout of the Swing Low Patterns occurs.

You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of 5 pips away from the low, to protect yourself from possible false breakouts. Knowing when to take profit is as important as knowing when to enter a trade.

The Best Stochastic Trading Strategy uses a static take profit, which is two times the amount of your stop loss. Day trading with the Best Stochastic Trading Strategy is the perfect combination between how to correctly use stochastic indicator and price action. The success of the Best Stochastic Trading Strategy is derived from knowing to read a technical indicator correctly and at the same time make use of the price action as well.

We also have training for the best short-term trading strategy. Please leave a comment below if you have any questions about the Stochastic Trading Strategy! Please Share this Trading Strategy Below and keep it for your own personal use! Thanks Traders! We specialize in teaching traders of all skill levels how to trade stocks, options, forex, cryptocurrencies, commodities, and more.

Our mission is to address the lack of good information for market traders and to simplify trading education by giving readers a detailed plan with step-by-step rules to follow. I found it easier to understand this Stochastic explanation and I will put into practice when the markets open, to check my understanding.

Hi Very very good , thank you so much. Can I have the settings for 5 minutes timeframe intraday trade please. Super easy strategy. One question. Do you get out of the trade once the k and d have crossed over the 80 level? I am beginner. I like the way you explain its. Would love it if you can produce pdf for me so that i can print.

Thank you very much.. Appreciate this is an old thread but I have just been backtesting and have a question if that's OK. I have found several instances when having identified the correct setup on the daily, I look at the 15 minute and the stchastic is between the bands. For example for a short trade are you saying that if the 15 min stochastic is between the bands after checking the setup on the daily then it is best to wait for the stoch to break into overbought, cross and return to the 80 level level before looking for the swing high.

Not sure i have explained all that well but hope you know what I mean lol I think that the settings should be default with this strategy! The NT8 version may look a bit different. I am also a big fan of the Stochastic indicator but I like to use a faster setting, this is.

Thanks for the feedback. All traders are different so that is perfect if you have had success using those settings. Can we use it on the 1 hour chart? I like the 1 hour chart because one can day trade and swing trade with it, plus one doesn't have to stare at the charts multiple times during the day. Thanks for this great strategy,Just want to find out if this stochastic settings will work 14,3,2? Thanks for the tweaking of an already great indicator! Couple of questions: 1 Article says to use Default settings of 14,3,3 but in the example box it says 14,3,1 - not a great difference but I want to be sure of the right settings.

Do you have or know of a 3-Bar Fractal Indicator that will mark this pattern like the standard 5-Bar Fractal Indicator? I have found only one on line and it was quite expensive to purchase I am too cheap. That is a really good question perhaps we could ask TSG to see if they would make one because they really make great indicators. To answer your first questions, yes the defaults are 14,3,1. Second, great idea! We have many new indicator ideas currently and we can add this to our list.

Its traders like you who keep us motivated to help. Thanks for sharing your idea. However,I would like to hear your opinion about implementing this strategy in binary options. Since things are a bit different in binaries, what you think about expiration time?

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This indicator measures momentum by comparing closing price to the trading range over a given period. The Stochastic oscillator is another technical indicator that helps traders determine where a trend might be ending. The oscillator works on the following. Part of the reasoning behind stochastic indicators is that a forex price has a tendency to close near the extreme of its recent price range before a turning.