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Learn Forex: A Simple Stochastics Strategy

By , Forex Trading Instructor
23 January 2013 03:00 GMT

Article Summary: Creating a Forex trading strategy does not have to be a difficult process. Today we will review a simple Stochastics strategy for trending markets.

When choosing a trading strategy, new traders often become confused by all the variables and indicators available to consider. Ultimately the key to trading success is finding a simple strategy that you understand, and have the ability to replicate. Today we are going to review the basics of creating a simple strategy by finding the trend then applying the Stochastics Oscillator.

Find the Trend

Before we enter into any trade, we need to find market direction by trend identification. Below we have the EURGBP on a 4Hour Chart. We can see the pair is making new highs while establishing higher lows. This is the first sign that the EURGBP is trading in a strong uptrend. This analysis can be confirmed by the use of a 200 SMA. Traditionally traders are bullish when price is above the 200 SMA and bearish if price resides under the indicator.

Given the information above traders should look to buy the EURGBP. If the trend continues, prices are expected to make higher highs.

Learn Forex – EURGBP 4Hour Trend

Learn_Forex_A_Simple_Stochastics_Strategy_body_Picture_3.png, Learn Forex: A Simple Stochastics Strategy

(Created using FXCM’s Marketscope 2.0 charts)

Entries with Stochastics

Once market direction is identified, we can then use an indicator to enter into the market. Below we can see the Stochastics (SSD) Oscillator on a 1Hour chart. Since we are only looking to buy in an uptrend, it is important to identify areas where the market is oversold. The Stochastics indicator marks this with the 20 level running horizontally along the indicator. Traders looking to buy a retracement can then enter the market when then %K value crosses above the %D value signaling a return to bullish momentum.

Below you will find several sample entries using Stochastics. The arrows below price have been included on the chart to better understand where execution may occur.

Learn Forex – EURGBP 1Hour Entries

Learn_Forex_A_Simple_Stochastics_Strategy_body_Picture_2.png, Learn Forex: A Simple Stochastics Strategy

(Created using FXCM’s Marketscope 2.0 charts)

Exiting Positions

Now that a trade has been opened, traders need to have a plan to exit the market. This is the final step in developing a successful strategy! Traders may choose a variety of stop / limit and risk reward combinations here to suit their trading needs. However, if you are already using the Stochastics Oscillator for entries, you can also use it to plan your market exit. If we are buying on a return to bullish momentum, traders should conclude buying when momentum subsides. This can be found when %K crosses back below %D. The green arrows below have identified where our sample trades would be closed using this technique.

Regardless of the methodology chosen, it is always important to have a plan to exit the market. Once you have this final component in place, you then proceed to test your strategy live in the Forex market.

Learn Forex – EURGBP 1Hour Exits

Learn_Forex_A_Simple_Stochastics_Strategy_body_Picture_1.png, Learn Forex: A Simple Stochastics Strategy

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .

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23 January 2013 03:00 GMT