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Fine Tuning an Entry with Stochastics

Fine Tuning an Entry with Stochastics

Richard Krivo, Trading Instructor

Student’s Question:

First off, thank you for all your help here!I've been struggling to find a pair with a strong trend on the daily chart that follows in the same direction on the 4hr/1hr/30min charts. I was not able to find a good place for an active trade but did find this previous short signal.This is and hourly chart of USD/CAD. I circled the crossover and corresponding candle. I would have placed my trade as follows:At the closing of the next candle after the crossover I place my short at the opening of the new candle at 0.97222 with a stop just above the high of the crossover candle at 0.97310 and target a profit of 0.97046 using the 1:2 risk/reward ratio.Let me know what you think about this one. Obviously we know it would have worked out since it has passed but had I placed this trade at the time, is my assessment/use of the indicator correct?I also have a question about this indicator. You can see on the next peak of the chart I posted the K line crossed well over but the D line only touched the line. They didn't cross each other above the 80 line. The next candle after that cross was green instead of red we would not have placed the trade but assuming it didn't, would we use that as a sell signal even though they didn't cross each other? Also, are we looking for BOTH K&D lines to cross the 80/20 line and then cross each other or could we derive a signal from only one (K or D) line crossing?Thanks again for all your help!!

Here’s the chart…

Instructor’s Response:

Nicely done on the USDCAD trade...You have taken a trade in the direction of the Daily trend off of a lower time frame chart (Multiple Time Frame Analysis) and used Slow Stochastics to fine tune your entry...very good work.

Regarding the Stochastics question, it is pretty much a matter of personal preference. Some traders like to see both the K and the D line above or below 80/20 andI am in that group.

Others, while it is a bit more aggressive, will take the signal if just one line is above or below and forgo the greater confirmation that the second line offers.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.