Learn Stochastic Strategy
This learn trading tutorial will talk about how to come up with a trading strategy that is based on the stochastic indicator. This stochastic strategy will be used by stock traders to trade trending markets. This strategy is simple to trade with & 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 trends.
Trend
The various techniques used to figure out & identify market trends.
·An upward trend is when the trading market is moving in an upward general direction and the price keeps making higher highs and higher lows.
·A downward trend is when the trading 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 trend, a trader can then use another method to confirm the market trend. For example a trader might use a trend line & if the trend line direction is up the market 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 market trend. If the price is above the 200 day moving average then the market trend is considered as an upward bullish trend. If the price is below the 200 day moving average then the market 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 indices 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 & the overbought level is the 80 mark on the stochastic oscillator.
Up-wards Stock Trend - in an upwards trend the trader will wait for stochastic indicator to pull back & move downwards upto the oversold levels. This will mean that there is a short term market retracement & 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 Trend - in a downward trend the trader will wait for stochastic indicator to retrace upwards & move upwards 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 indices 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 upwards 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 indices 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 trading plan.
