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The two stochastics trading strategy
2019-11-11 • Updated
Information is not investment advice
One stochastic oscillator is always good to consider during the trading day. But what do you think about two stochastic oscillators? Today FBS is going to explain to you the benefits of two stochastic oscillators and describe you a simple but effective strategy based on them.
The first step – Implement the indicators.
To begin with, do you know what stochastic indicator is? Generally speaking, it compares the closing price to a price over a certain period of time. If you want to learn more about it, read our guidebook.
For the current trading strategy we need to implement two stochastic oscillators with the following settings:
- %K period = 9, %D period=3, Slowing=3 – fast oscillator;
- %K period = 21, %D period=9, Slowing=9– slow oscillator, which is used as a filter.
- The oversold level = 20 and the overbought level = 80. For the assets with low volatility, you may move them to 30 and 70, respectively.
You can set up these settings in the “Parameters” window of the indicator.
The settings above work good with M5-M15 timeframes.
Second step – Enter the position
Generallу speaking, you open your position after when the following conditions are met.
- You can open a long position when the lines of the fast stochastic cross each other within the oversold zone and the lines of the slow stochastic are placed in the oversold zone.
- You can open a short position when the lines of the fast stochastic cross each other within the overbought zone and the lines of the slow stochastic are placed in the overbought zone.
If you are a cautious trader, you may wait for fast oscillator to leave the overbought/oversold zone. In this case, you may get less false signals, but at the same time, you may skip profitable entries.
As usual, you place your stop loss at the last local minimum/maximum or behind the high/low of the signal candlestick when you opened a position. You take profit when the lines of the slow stochastic indicator leave the overbought/oversold zone.
Let’s consider the example. On M15 chart of EUR/USD, both slow and fast stochastic indicators were moving within the overbought zone. We waited for a crossover of the fast stochastic indicator’s lines to cross within this zone and opened a short position at the open price of the next candlestick at 1.1386. Our stop loss was placed at 1.1389 (higher than the previous resistance) and we placed take profit at 1.1378.
Important notice: this strategy works well when trading the pairs with high volatility. It is not recommended to implement it in other than Forex markets.
In this article, we described how you may use two oscillators for successful scalping. However, you need to be careful and pay attention to the false signals.
What do we do when the price enters uncharted territory with no previous lows or highs to serve as support and resistance levels? Here is your guide into the unknown.
Let us find out what are the basic elements of price action and what you need to master to trade this system.