TRADING WITH THE STOCHASTICS (10,3,3)

THE STOCHASTICS(10,3,3) 

   

The stochastic is one of the oscillators that must be already installed in your trading platform. Stochastic is another indicator that helps us determine where a trend might be ending.  By definition, a stochastic is an oscillator that measures overbought and oversold conditions in the market.  

How to Apply Stochastic

Like I said earlier, stochastic tells us when the market is overbought or oversold.  Stochastics are scaled/ measured from 0 to 100.  When the stochastic lines are above 80, then it means the market is overbought.  When the stochastic lines are below 20, then it means that the market is oversold.  An over bought market simply means that a pullback will occur when the market is over sold, and a rally is due. As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought. 

This is the basics of stochastic.  Many traders use stochastic in different ways, but the main purpose of the indicator is to show us where the market is overbought and oversold.  Over time, you will learn to use stochastic to fit your own personal trading style.  

Stochastic Oscillator

The Stochastic Oscillator was developed by Dr. George Lane to track market momentum.

The indicator consists of two lines:

• %K compares the latest closing price to the recent trading range.
• %D is a signal line calculated by smoothing %K.

The number of periods used in the indicator can be varied according to the purpose for which the Stochastic is used:

Purpose:	%K Periods	%D Periods	Overbought level	Oversold level	Comments:
Combine with trend indicator	5 to 10 days	3 days	80%	20%	Very sensitive
Stand-alone or trade longer cycles	14 or 21 days	3 days	70%	30%	Only shows important turning points

Trading Signals

If the Stochastic hovers near 100 it signals accumulation. Stochastic lurking near zero indicates distribution.

The shape of a Stochastic bottom gives some indication of the ensuing rally. A narrow bottom that is not very deep indicates that bears are weak and that the following rally should be strong. A broad, deep bottom signals that bears are strong and that the rally should be weak.

The same applies to Stochastic tops. Narrow tops indicate that the bulls are weak and that the correction is likely to be severe. High, wide tops indicate that bulls are strong and the correction is likely to be weak.

Ranging Markets

Signals are listed in order of their importance:

1. Go long on bullish divergence (on %D) where the first trough is below the Oversold level.
2. Go long when %K or %D falls below the Oversold level and rises back above it.
3. Go long when %K crosses to above %D.

Short signals:

1. Go short on bearish divergence (on %D) where the first peak is above the Overbought level.
2. Go short when %K or %D rises above the Overbought level then falls back below it.
3. Go short when %K crosses to below %D.

Place stop-losses below the most recent minor Low when going long (or above the most recent minor High when going short).

%K and %D lines pointed in the same direction are used to confirm the direction of the short-term trend.

Trending Markets

Only take signals in the direction of the trend and never go long when Stochastic is overbought, nor short when oversold.

Use trailing buy- and sell-stops to enter trades and protect yourself with stop-losses.

Long:

If %K or %D falls below the Oversold line, place a trailing buy-stop. When you are stopped in, place a stop loss below the Low of the recent down-trend (the lowest Low since the signal day).

Short:

If Stochastic rises above the Overbought line, place a trailing sell-stop. When you are stopped in, place a stop loss above the High of the recent up-trend (the highest High since the signal day).

 TRADE CONFIRMATION WITH THE STOCHASTIC

Since we give our signal from the daily chart, we/you are to confirm the signal and open a tradable position in the direction of each of the signal from the 30 minute chart. Our pattern is to therefore use the 30 minute to confirm our signal that was shown on the daily chart.

 

And to confirm the signal, we will be making use of the stochastic indicator. Luckily for all our readers, the stochastic is already fixed in your trading platform. All you need to do is to activate this indicator on your platform.

 

And bear in mind that instead of the 5, 3, 3 default settings of the stochastic, we use the 10, 3, 3 settings for our trading.

 

 

So, to confirm our signal from the 30 minute timeframe, simply look for oversold and overbought levels on the 30 minute chart and open your market order once the stochastics’s % K line crosses above the % D line from the oversold level for bullish signal confirmation or if the % D line crosses below the % K line from the overbought level for bearish signal confirmation. Bear in mind that our signal is only confirmed in overbought and oversold markets.

 

Thus, you’ve seen how we confirm the signals that we post on this site. We are able to do this so that you can learn by yourself how to confirm the signals that we post on this site so as to win much of your trades.

 

Bear in mind that the 30 minutes chart is used to confirm the signals that we received from the daily chart while the 4 hours chart is used to confirm our signals that was given from the weekly chart. The same process that we used in confirming our trade from the 30 minute chart is also applicable when confirming a trade from the 4 hour chart.

 

 

 

HAPPY TRADING

 

FROM THE AUTOPILOT FOREX TEAM