This strategy is convenient for binary options, because it gives fairly accurate signals about the overall direction of the trend. For Forex this strategy is not recommended because of its task — identifying the change in the trend on a given timeframe. In volatile markets the profit on this strategy will cut down the spread.
Stochastic — the indicator showing the position of the current price relative to price range for a certain fixed period in the past. It is believed that the value of the stochastic oscillator is above 80% — a signal to open short position (sell) below 20% — long (buy).
This strategy is a type of trade on stochastic, but somewhat mutated, with the confirmation signal. Its full name — DrakeDelayStochastic, Delay Stochastic from Drake. The essence of the strategy is that the modified stochastic is a confirming signal for the main technical indicator DrakeDelayStochastic. The main indicator draws the channel (the range of price changes based on historical data), an additional indicator confirms the strength of the signal to buy or sell.
Trade on stochastic
The source data strategy of trading on stochastic:
- indicator DrakeDelayStochastic (easily installed on MT4);
- trading time — American and European sessions. Makes no sense to trade on this strategy at night Asian session, which is characterized by a horizontal trend (flat), because of the lack of clear direction of trend;
- asset — almost any, ranging from currency pairs, ending in precious metals;
- timeframe is M5 or M15 (M1 is possible, but not desirable, so select not most volatile assets in advance).
Signals to buy:
- the price trend reaches the lower border of the channel and comes in blue or red zone (red zone is a stronger signal);
- under the current candle indicator draws a yellow dot;
- stochastic (confirming signal) is below 20% (oversold).
When all these conditions are met, – open the position to buy (Call). The situation is similar with position to sell (see the figure). Trade on stochastic and DrakeDelayStochastic gives infrequent, but the most accurate signals.
The figure shows that the sell signal is particularly clear: first, the price came to the lower point of the red range, and secondly, only the time of occurrence of the yellow dots is oriented upwards (in height). A signal to sell (Put) is less strong. First, the price just touched the red band, and secondly, at the time of the appearance of the stochastic point has a horizontal trend in the overbought zone.
- Important: the period of expiry should be selected depending on previous candles. The time interval should be equal to three candles on the current time interval.
And a couple of tips on how to improve this strategy:
- To enter the market is better on the higher timeframe. H1 is not suitable, but M5 or M15 — ais better.
- Even more exact match is when the stochastic lines cross, that will talk about the change of trend direction.
- If the signals are accurate, simultaneous opening of multiple transactions is possible.
- Mathematical expectation of profit in the tactics described above, is higher than losses. In other words, do not use martingale, it is better to take a fixed rate.
- If, after installation of the indicator DrakeDelayStochastic the graph shows only one red line, in its parameters, change the value slwsignal from “1” to “2” or “3».
Summary. Trade on stochastic is one of the most simple strategies, but the signals from the indicator react to the noise. Because it is used as additional (supporting). DrakeDelayStochastic in this case is a good solution as the primary tool. For beginners, this combination of instruments is a good way to understand the principle of trade is stochastic, what is the oversold and overbought price channels.