Super Methods to Profit with the Stochastic Oscillator

Published: 07th October 2011
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The Stochastic Oscillator indicator is a great FX indicator that was made public by the famous analyst George Lane at the late 50s. It is worth noting that this FX indicator is still used to this day by a lot of traders worldwide. This article will describe how to supercharge your trading system with Stochastic Oscillator for great gain in any Forex pair and any stock.

The Stochastic Oscillator shows the location of price in relation to local high and low of the last 5 candles (by default). As a conclusion, when it reaches its low values it means that price is near a support level, and when it reaches overbought level it is near resistance level (and may go down). It is recommended to confirm these signals by price-action, to confirm that the price is actually on a support or a resistance level.

One trading tactic of trading the Stochastic is the overbought\oversold system. When this index touches the overbought level (usually 80) downwards it is a sign that the bullish trend is at its end and it is the time to sell. When the Stochastic Oscillator index crosses the oversold level (usually 20) upwards it is a buy signal and a sign that an uptrend is about to begin. The idea behind this trading tactic is that when the price touches support or resistance level and begins to reverse, we join the trend and profit from it. It is recommended to trade with another Stochastic Oscillator with a longer period of calculation, to confirm the trend direction and make the signals more accurate. Another advantage of this method is the fact that it trades with very small stop loss.

Another trading method that uses this oscillator is the middle-line cross. When the index touches the middle-line (level of 50) from above it is a short signal and when it crosses it from below it is a long signal. This is the ordinary trend-following trading tactic that is late but may profit at Forex pairs that trend strongly.

Another trading trading tactic is the the POP method the idea behind it is exactly the reverse. The basis of this system is to enter long trade when the index goes above 70, and sell trades when it goes below 30. Trades are closed when the Stochastic crosses the overbought (for buy trades) or the oversold (for sell trades). This method performed well at the 70s and 80s and works even today on FX pairs that trend strongly like the GBP\JPY.

We recommend placing the stop loss 1 pip below the lowest low of last 4 bars (for short trades), and 1 pip above the highest high of last 4 candles (for long\trades), so your risk is minimized and your profit is very big. This system works exceptionally well with the overbought\oversold trading system. As usual, it is recommended not to risk higher than 1-2% of your capital on a single trade, this is standard money management techniques that should be used regardless of your trading system.

In conclusion, the Stochastic Oscillator is a very strong technical indicator that made profits for the last 65 years and will continue to profit this way for years to come. Learn to use and master this FX indicator, as it could highly improve your trading system and win rate.

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