Stochastic Forex System - Combining Stochastics with Different Types of Indicators in Forex
This tutorial should be called: Combining Stochastics with other Indicators, but Stochastic Forex Trading System sounds real nice.
Stochastic Oscillator technical indicator can be combined with other indicators to form a trading system. For our examples we will combine it with:
- RSI
- MACD
- Moving Averages FX Trading Technical Indicator
Example 1: Forex Stochastic System
Sell Forex Signal Generated using Stochastic System
From our forex system the sell trading signal is generated when:
- Both Moving Averages are moving down
- RSI is below 50
- Stochastic moving downward
- MACD heading downwards below centerline
The sell signal was generated when all these forex trading rules were met. The exit forex signal is generated when a signal in opposite direction is generated i.e. When the technical indicators reverse.
The good thing about using such a forex system is that we are using different types of indicators to confirm the trade signals & avoid as many whipsaws as possible in the process.
- Stochastic - is a momentum oscillator indicator
- RSI- is a momentum oscillator indicator
- Moving Averages Technical Indicator- is a trend following indicator
- MACD- is a trend following indicator
It is very useful to combine more than one indicator, as a combination of forex trading signals is better than relying on just a single indicator. The technical indicator combinations reinforce each other, and cancel out false whipsaw forex signals.
A forex trend following indicator helps a trader to see the overall picture, while using more than one momentum indicator gives better & more reliable entry and exit points for trading forex.
The indicators combinations & their forex trading signals help to decipher a lot of the market activity.
Example 2: Forex Stochastic System
Buy Forex Signal Generated using Stochastic System
For this example the forex trend is clearly upward, but at some point there were a few forex trading whipsaws generated by the stochastic oscillator indicator, can you spot them? - So the question is how can a trader avoid trading these forex whipsaws?
Well, the answer is that by looking at the other technical indicators such as MACD indicator a trader could have avoided the whip saw, even the MACD technical indicator had not given a crossover forex trading 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 heading downwards then the trend is still upwards. As you can see from the above example MACD indicator never went below zero line and afterwards the upward trend continued with the MACD forex trading indicator maintaining above Zero line & continuing to move upward.
During ranging forex markets Stochastic Oscillator indicator will give the fastest forex trading signals which are prone to whipsaws. This is why stochastic oscillator indicator is best combined with other indicators & the forex signals traded are confirmed by another one or two other Forex indicators.
