Learn Indices Stochastic Strategy
This learn indices trading tutorial will talk about how to come up with a indices trading strategy that is based on the stochastic indicator. This stochastic strategy will be used by stock indexes traders to trade trending stock indices markets. This indices trading 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 indices trends.
Indices Trend
There are various methods used to determine and identify market trends.
·An upward trend is when the stock indexes trading market is moving in an upward general direction and the stock indexes price keeps making higher highs and higher lows.
·A downward trend is when the stock indexes trading market is moving in a downward general direction and the stock indexes price keeps making lower lows and lower highs.
This is the first thing to look for when determining the indices trend, a indices trader can then use another method to confirm the indices trend. For example a indices trader may use a indices trend line and if the indices trend line direction is up the indices trend is then upward but if the indices trend line direction is down then the indices trend is downwards.
A indices trader can also use the 200 day moving average to determine the indices trend. If the stock indexes price is above the 200 day moving average then the indices trend is considered as an upward bullish trend. If the stock indexes price is below the 200 day moving average then the indices trend is considered as a downward bearish trend.
Stochastic Trading Strategy
After determining the indices trend the indices trader will then use the stochastic indicator to determine where to open a buy or a sell indices trade. For this strategy a indices trader will use the overbought and oversold levels to determine when to open trades. The oversold level is the 20 mark on the stochastic and the overbought level is the 80 mark on the stochastic oscillator.
Upward Trend - in an upward indices trend the indices 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 indices 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 indices trend is upwards and this will only be a temporary stock indexes price pullback.
A indices trader will open a buy indices trade once the stochastic oscillator leaves the oversold level and starts moving upwards.
Downward Trend - in a downward indices trend the indices 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 indices 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 indices trend is downwards and this will only be a temporary stock indexes price retracement.
A indices trader will open a sell indices trade once the stochastic oscillator leaves the overbought level and starts moving downwards.
A indices trader can use this strategy to find the best place where to open a trade after a indices price retracement. This will increase the chances of the indices trader becoming more profitable because the trades will be opened at the best point - that is after a indices 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 stock indexes price is already oversold in an upward trending market or overbought in a downward trending market.
A indices trader should then set their stop loss a few pips below where they opened a buy indices 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 indices trading plan.
