Perfect trading strategy with stochastic oscillator

10-2-01 Chicago Mercantile Exchange, 30 S. Wacker dr....Eurodollar pit is a flurry of activity after Federal Reserve lowers interest rates.......Rich Hein/Sun-Times

Indicator based trading can be very tricky unless the trader knows how to use it properly. Stochastic is one of the most widely used indicators to measure the selling pressure and buying pressure of any currency. Combining the stochastic oscillator with other trading strategies can be extremely profitable if the traders know how to use the “perfect stochastic oscillator settings.”

Example of using double stochastic oscillators

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Perfect Sell Entry with Stochastic Oscillator

In the above figure we have combined two stochastics oscillator trading strategy with dynamic moving average support and resistance level. The first stochastic has the default value but the second stochastic has “K period 21, D period 7 and the value of slowing is 7”.

Trade Setup

We have used two moving average for trading “USDCHF” with two stochastic oscillator. The green one is 200-day moving average when the red is 100-day moving average. Professional trader tries to find price action confirmation pattern near the dynamic support and resistance level when the both the stochastic oscillators are in “overbought or oversold condition.”

A bearish engulfing pattern is formed right at the resistance level in the weekly chart of “USDCHF”. The trader then confirms the trade entry by seeing the two leading oscillators. Both of them are in the overbought region which signals the trader as the perfect opportunity to short this pair.

Stop loss and take profit

Traders should be extremely cautious while using the stochastic oscillators since it’s a leading indicator. Stop loss should be put right above the resistance level in case of selling the pair. Take profit area can be determined by using the previous support and resistance level of a pair. Remember indicator is just a helping tools to filter out the odd trade out of path. Don’t rely too much on indicator while taking the decision. “The best result can only be achieved by combining indicators with valid price action setup.”

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