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Using Slow Stochastics

Using Slow Stochastics

2010-06-03 20:37:00
Richard Krivo, Trading Instructor
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Take a look at the chart below for a visual…
 
Slow Stochastics is essentially two moving averages moving between two levels: 80 (the upper level) and 20 (the lower level) both denoted below the chart with the red dotted lines.  
 
The way a trader would employ it in trading is to first determine the direction that they want to trade the pair and, ideally, that will be in the direction of the trend on the Daily chart.
 
Once that has been determined, then the trader can use Stochastics to time their entry in that direction. Assume the pair has a bullish trend so we would only be looking for buying opportunities. The strongest buying signal that Stochastics will generate is after the lines have been below 20, crossed over one another, and then close above 20. That indicates that bullish (upside) momentum is in place. The trader can then take a long position having “fine tuned” their entry by using Stochastics.
 
For a short position, it would be the same exercise only we would wait for Stochastics to close below 80 after having been above 80.
 
On the chart below, you can see how the yellow boxes on the Stochastics indicator match up with the yellow boxes on the candlestick price chart above.  The lower boxes on the 20 line would indicate a Stochastic signal that shows bullish upside momentum is favored and the upper boxes on the 80 line signal when bearish downside momentum is favored.
 
chart 6 3 10

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