One of trading system that can be used is a combination of Bollinger Bands (BB) and Stochastic Oscillator (SO). The combination of these two indicators can mutually reinforce confirmation whether a currency pair is going to reverse direction or is still in a trend. These two indicators can complement each other.
As you know, BB shows the range of possible prices using the approach of the lower boundary line, the midline and the upper boundary line that has been discussed in the article Simple Trading System and Profitable With Bollinger Bands. As for SO, it has also been discussed in the article Simple Trading System and Profitable with Stochastic Oscillator if you want to use these indicators separately.
At this time, we will see and discuss what if these two indicators are applied to trading strategy. See the appearance of these two indicators in the following figure.
Display of Bollinger Bands and Stochastic Oscillators
It can be seen that SO and BB will show confirmation when they are at the same point. When the candlestick touches the lower boundary line BB and together with the SO which is also in oversold territory, there is a possibility that the price will reverse in the direction of the upside. Meanwhile, if the opposite happens, if the candlestick touches the upper boundary line BB and SO also shows overbought, then there is a possibility to go down.
Meanwhile, if the price is in a trend, both indicators will show the same position. The same position is when the candlestick touches a line from BB and SO pointing to the oversold or overbought direction. Let’s look again at how to determine entry using these two indicators, see the following picture.
Entry Points Using Stochastic Oscillator Indicators and Bollinger Bands
Entry against the current can be done when both the BB and SO indicators are at the same point. We can do a sell entry when the candlestick reaches the upper limit of the BB and at the same time the SO also enters the overbought area. This shows that the price has gone up too high and tends to fall.
While on the contrary, when the candlestick touches the lower boundary line of BB and SO is also in the oversold area, then at that time we should start to buy orders. This is because the price is considered to be too cheap and has the potential to rise. It is very easy and simple trading technique but can get profit.
Meanwhile, for those who follow the trend, you can also use these two indicators. Look at the following picture.
Stochastic Oscillator and Bollinger Bands Indicators When Trends Occur
At the moment the candlestick continues to be in the upper line of BB, at the same time SO also continues to be above the number 70 and remains in the overbought area. This happens when sentiment is so strong that prices continue to rise. The same thing applies when the trend is down, where there is a possibility the candlestick continues to be in the lower boundary line BB and SO also continues to be in the oversold region.
Although it can be used for those who trade in trend, most traders who use both of these indicators use it against the trend. So, these two indicators are more suitable for use when the forex market is quiet or sideways. Because, there is a possibility that prices will go back and forth and up and down so that they can be read properly with these two indicators.
SL and TP?
There are many ways to determine profit targets. For those who follow the trend, SL can be set by using the pips or percent loss approach with a target profit when the candlestick touches another boundary from BB or when the SO starts entering another saturated region. As for those who follow the trend, the loss limit can be set with the BB boundary line opposite or the SO is starting to fall.
Profit targets that use the rules to follow the trend, can be set as closely as possible to follow the candlestick that continues to move until a candlestick is formed that indicates there will be a reversal of direction or when SO starts to fall from the saturated region. Or by looking at starting to move the candlestick away from the BB line or both. Just see which happens first.
It remains to be remembered that the system using these two indicators does not guarantee 100% profit and be successful. Therefore the loss limit must remain and be installed at every time an entry is made. Indicators are only tools to see what is likely to happen, not tools to see the future that will happen.
Always obey the rules when conducting transactions, because most traders make the mistake of breaking the rules they made themselves. Do not get carried away quickly when experiencing losses or when making a profit. Keep doing the analysis with good and focused mind to achieve forex trading techniques that are consistent profits.