After reviewing some modern indicators, you may begin to think that their developers wanted to «invent a bicycle», as the methods of analysis applied in these strategies have been developed years ago and developers have changed only some minor details.
However, there are strategies based on the use old and reliable indicators and we will devote this article to one of them in.
Stochastic is an indicator available in the trading platform. As a rule, in trading strategies it is used in combination with some other indicators because on its own it gives a lot of false signals. At the same time it is a reliable indicator and a trader just need to select appropriate settings in order to reduce the number of false signals.
First of all we will change standard settings as shown in the figure above.
- Period К% — 14.
- Period D% — 3.
- Slowdown — 3.
With these settings the indicator will give a lot of signals and the number of false signals will also increase.
Now, open the tab «Levels» in the settings and change the upper and lower limits to 70 and 30 respectively.
Let’s place an addition level of 50. This will be the middle line of the indicator.
So, we have finished with the required settings and now will review keynotes of Stochastic strategy.
We know that Stochastic has overbought and oversold zones. It is considered that when the price goes beyond one of these zones, the trend will soon change. In fact, the price can continue to move without changing direction for a long time, while the indicator will give signals in the opposite direction.
It turns out that overbought/oversold zones are the factors, which traders shall not rely on. That is why, strategy developers recommend traders to move the zones 10 points closer to the cent level and place an additional middle level. In this strategy, these zones are not considered as the key zones, although we will focus on them when opening trades.
Signals and trading strategy
By changing settings we will not be able to reduce the number of false signals, but yet can minimize risk of loss. Let’s view the example of trading on the 15-minute timeframe with the use of only one indicator — Stochastic. First signals from this indicator will come when the lines begin to leave one of the zones and reverse.
Note that in this strategy prior to opening a position we divide trading lot into three parts. That is, if a trader has a lot of 1.0, for the first transaction he/she will use a lot of 0.3.
If the price moves in the desired direction, next position of 0.3 lots will be opened at the moment of crossing the level of 50.
The third position will be opened at the moment when the price enters the opposite zone, in our case, it is the overbought zone.
The signal to close a position is the moment when the indicator’s lines swap positions. It can happen at any stage, but due to the fact that the trading lot has been split into three parts, we will reduce losses, which can occur because of the false signals.
In this strategy we will only place stop-loss orders to reduce the impact from unexpected sharp price jumps.
It is not necessary to place take-profit orders, since there will be a lot of signals during the trading session and the trades shall be closed manually.