Learn Forex Stochastic Strategy
This tutorial will talk about how to come up with a forex trading strategy that is based on the stochastic indicator. This stochastic strategy will be used by traders to trade trending forex markets. This forex strategy is simple to trade with and simple to follow. Using the stochastic oscillator indicators traders can use this indicator to come up with a trading strategy that will be used to identify forex trends.
Forex Trend
There are various 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 forex trend, a trader can then use another method to confirm the forex 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 downwards.
A trader can also use the 200 day moving average to determine the forex trend. If the price is above the 200 day moving average then the trend is considered as an upward bullish trend. If the price is below the 200 day moving average then the trend is considered as a downward 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 and the overbought level is the 80 mark on the stochastic oscillator.
Upwards FX Trading Trend - in an upward trend the trader will wait for stochastic indicator to pull back and 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 gets to the oversold level it will not stay there for long because the trend is upwards and this will only be a temporary price pullback.
A trader will open a buy trade once the stochastic oscillator leaves the oversold level and starts heading upward.
Downwards Forex Trading Trend - in a downward trend the trader will wait for stochastic indicator to retrace upwards and move upward 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 and this will only be a temporary price retracement.
A trader will open a sell trade once the stochastic oscillator leaves the overbought level and starts heading downward.
A trader can use this strategy to find the best place where to open a trade after a price retracement. 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 retracement. 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 upward 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 trading plan.
