In the forex world, several indicators are often used and commonly used to analyze the possibility of price movements of a currency pair. Stochastic Oscillator (Stochastic or SO) is one indicator that is often used for this. This indicator is classified as an indicator that is easy to read and understand and can be a simple but profitable trading technique. In fact, this forex trading technique can bring in profitable profits if it can be put to good use.
The SO display is very simple, with two lines identified as Slow Stochastic and Fast Stochastic. These two lines will give direction to the direction of a pair, whether it shows a trend or a signal for us to enter an order. This line reading is similar to the use of the Moving Average indicator.
Stochastic is automatically found on every commonly used MT4 or trading platform. This indicator is one of the basic indicators and has been used for decades in the forex world. In the indicator list section, we will easily find this indicator along with other indicators that are classified as basic indicators.
Display of Stochastic Oscillator
Stochastic is arranged based on 3 parameters, namely% K,% D and% S. % K, also called Fast Oscillator or Fast Oscillator
While% D or often also called Slow Oscillator or also slow Oscillator is the average movement of% K
And% S is the period or deviation that we can determine the value of, usually it will automatically be at number 3.
On display,% K is usually seen as a solid line that goes up and down in the range 0-100. While% D is usually seen as a dotted line that follows the% K line and is also in the 0-100 range. As mentioned before, the use of this indicator is to look at the intersection of these two lines as using Moving Average.
Read also : Simple Trading Strategy and Profitable
How to do simple but profitable trading techniques with Stochastic Oscillator?
Forex trading techniques using the Stochastic Oscillator are quite simple. In fact, if done correctly it can be a forex trading technique that produces consistent profits. What needs to be done is to follow the trading rules and always put a stop loss as a trading security from unexpected things, which makes prices move beyond our analysis.
Back to see the image of Stochastic. Previously we already knew that there were two lines displayed on this indicator. From these two lines we can enter, which is when these two lines intersect. Always, the Stochastic fast line alias the dotted line which always intersects with a stochastic or slow line. This intersection can occur in the upper area, lower area or in the middle of the Stochastic range. See the following picture.
The blue circle is when there is an intersection between slow and fast stochastic. This is the entry point for buy or sell orders in a currency pair. Intersection occurs not only at the extreme or the bottom, if we look at the picture above. The intersection can also occur in the middle of the Stochastic range, as happened on May 3, 2019 in the picture above. The focus, of course, at this time is the intersection that occurs in the upper or lower extremes.
The range of this Stochastic area starts from 0 to 100. The number 0 indicates that the price of a currency pair is oversold and the number 100 indicates that the price of a currency pair is overbought. This term means that according to this indicator, prices are too much up (overbought) or down (oversold), so there is a possibility to reverse direction.
As traders, we can do sell orders if the intersection occurs above 70, which means the price is overbought. Or we can buy if the intersection occurs below the value of 30. This indicator is designed as a counter trend, so it is suitable for traders of this type or who are waiting for a reversal. Note the correlation when the Stochastic is at the bottom and top intersection with the candlestick formed in the following figure.
Correlation of Stochastic Intersections and Price Movements
It can be seen that the correlation between the Stochastic crossing and the price movement is in tune. When the intersection occurs above, the candlestick also switches direction from up to down. Vice versa, when the Stochastic intersects below, the candlestick changes direction from down to up. From here, we can make sell entry orders when they intersect above and buy when they intersect below.
What about the SL and TP?
As you well know, SL can be determined mathematically based on the percent of losses that can be tolerated from the capital we have (1%, 2% or other amounts) and then converted to pips and lots. TP can be arranged with the same approach. Another way is to use the next intersection as the end of the current order. So, we only enter when the intersection of the lines occurs and take profit when the intersections again form.
What To Look For In This Trading Technique?
To further explore the use of this indicator, it is better to keep doing a backtest with SL and TP that have been determined. Or, you can test it first on a demo account to see how high your accuracy level is. Like other indicators, this indicator is also based on data input within a certain time frame. The more data collected, the higher the level of validity of a data output. In this case, the higher the time frame that we use (minimum H1), the higher this indicator will have an accuracy level.
Stochastic itself should be set to the default settings for fast, slow and deviation values. The initial format of this indicator setting is 5,3,3 meaning that the value of fast is 5, slow is 3 and the deviation is 3. Worrying, if we choose a value of fast more than 5 then the line does not reach the extreme point and then reverses, so we don’t know whether overbought or oversold. If it is slow or diviated by more than 3, the intersection may be too fast or too long, so we miss the momentum or make an entry too fast.
Stochastic is a leading indicator so that it can provide clues to the possible direction of movement of a currency pair going forward. However, the weakness is that sometimes it is too fast to give a predictive direction. For that reason, we need to provide a “filter” in the form of lagging indicators that are slow to respond to possible movements, such as Moving Average.
This trading technique is relatively simple but can generate enough profit if you pay attention to the above. Especially if done with strict rules about stop loss, this forex trading technique can be a consistent profit in the future.
Good luck using this indicator.