One of the hallmarks of a downtrend is when price action makes lower highs and lower lows. As we observe those lower highs on a chart, they can take on the appearance of steps. In a downtrend, the steps go down, while in an uptrend the steps go up.
Take a look at this historical Daily chart of the USDCHF below…
We can see that the pair has been in a strong downtrend for quite some time. In this situation we can see (if we use our imagination just a little bit) how price action has been “stairstepping“ to the downside.
As we see this set up forming, a trader would wait for the pair retrace, move against the overall trend, wait for the pair to stall after the retracement and then short the pair back in the direction of the overall trend.
Have you heard of selling a rally and buying a dip? This is selling a rally. We wait for the price action to rally up and then sell it.
In an uptrend we would do the opposite. We would wait for price action to dip and then buy it back into the uptrend.
On the chart above we see that we can time our sell entry by waiting for Slow Stochastics to crossover to the downside. By waiting for the crossover to take place, we can be more confident that downside momentum is now favored on this pair.
Bottom Line: Seeing this “stairstep” pattern on a strongly trending chart should alert a trader to find an entry after the next time that the pair rallies up. Be in position to short that rally after it stalls and Slow Stochastics provides the entry signal.
For much more information on Stochastics, click HERE to visit our On Demand Video Course Section. After you click, scroll down to the section on Stochastics and there you will find four lessons on this indicator. When prompted for a username and password, use the logins that you would use for your live trading account.
--- Written by Richard Krivo, Trading Instructor
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