30 Minute Stochastic Strategy For Trend Followers

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Contents

30 Minute Stochastic Strategy For Trend Followers

Following the trend may not be cool in some parts of your life but it can be very profitable when speculating financial markets. This article is a follow up to a previous post I made called “Two Rules For Trading With Oscillators”. What are the two rules? Only take trend following signals and beware false breakouts. In the article I treated the group of oscillators as one indicator for educational purposes but now is the time to get down to the brass tacks and talk about my favorite oscillator, the Stochastic. The stochastic will give a number of different trend following signals that I will rank in order of importance and describe how I use them to trade. These methods can be used in any time frame but I prefer to use longer ones like daily or hourly. For forex binary options 30 minutes charts are preferred, especially for pairs that trade in tighter ranges.

Why should you only take trend following signals? Because they are much stronger. Think about it like this. When the ocean tide is rising is the next wave more or less likely to be higher than the next? Trend following signals take advantage of the markets own movement and are much more reliable than other types of signals in my opinion. I am going to assume that you already have an understanding of trend so I won’t bore you with that but just to touch base I use trend lines and the stochastic itself to predict trend.

The Basic Stochastic Trend Following Signal

The basic stochastic trend following signal is a simple signal line crossover. This signal occurs whenever the %K line crosses the %D line in line with the trend. Stochastic is displayed as two lines; %K which is the short term line and %D, the long term and signal line. In the case of an uptrend whenever the %K crosses below the %D and then moves back above it a buy signal is given. The reverse is true for a downtrend. It is also the weakest signal stochastic can give because it is not being confirmed in any way. Price action could be above or below resistance, extended far above the moving average or in the middle of a potential topping pattern. This does not mean that the signal is not good, just not strong. In order to make the most of this signal you should wait for a stronger signal and then use the basic signal for short term entries with several hours to end-of-day expiry.

A Much Stronger Stochastic Signal

A much stronger stochastic signal occurs following a pullback or correction of the trend. This is when your moving averages, trend lines and other trend measuring techniques come into play. After the pullback, most likely along some line of support/resistance that may include a trend line, Fibonacci Retracement or Bollinger Band, stochastic will give another basic signal. Only this time it is not so basic. A stochastic signal that occurs in line with a trend confirming bounce is much stronger than the basic signal and can be used as a starting point for using the basic signal for trade entries. Once the trend confirming signal occurs any basic signal can be taken as an entry until price action reaches resistance. Sometimes this signal can be hard to trade on because prices are (assuming bull market) in decline and testing or maybe even breaking support. Not to worry though, even if you miss the first signal there is another, much stronger trend confirming stochastic signal that may follow.

How To Trade The Strong Stochastic Trend Confirming Signal

It is not uncommon to miss the first signal. I often will wait for the trend confirming signal just because of its strength. Once price action has retreated to the trend line or support and has made the first strong trend following signal prices will often retest support. When this happens stochastic can confirm the move. Look at the chart of the S&P 500(Hourly) below. Starting on the left had side at position 1 there is a bottoming pattern that comes with a weak signal. After the weak signal prices retest support and at the same time stochastic confirms with the strong trend following signal. At that point prices move up for the next four days providing three more signals, averaging one signal per day.

Next you can see that prices meet resistance at position 2, stall for two days and then make a bounce from the moving average breaking resistance. Stochastic gives off a weak signal but I give it a weak(+) rating due to price action, trend, support line etc. Note that from here there is no strong signal given, only another weak one. Prices approach resistance at position 3 which is our warning to stop entering new trades. From here prices stall again, stochastic starts to fluctuate a little wildly in the near term and to diverge in the long term. The divergence confirms the previous warning not to trade. Notice how the next two weak signals fail to produce adequate movement to ensure profitability.

Now, the last signal on the chart at position 4 is very interesting. It is a little stronger than a weak signal but not a strong signal. I classify this as a basic signal for this reason. Both the %K and the %D lines are pointing up. All of the previous weak signals on this chart happened when %D was pointing down or flat at best. This signal resulted in a profit and has left the index sitting on support. Now it is time to watch for a confirmation of support from price action and from the stochastic. I use this strategy every day to trade every asset I watch. You can find out more about how I use stochastic to trade with the trend on my blog.

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Best Stochastic Trading Strategy- Easy 6 Step Strategy

Day trading with the best Stochastic Trading Strategy is the name of the strategy we’ll discuss today. As the name suggests, this is a stochastic strategy suitable for day traders. The stochastic strategy is much the same as the Day Trading Price Action – Simple Price Action Strategy.

The only difference this time around is that we incorporate a technical indicator into this strategy. Namely, the stochastic indicator. This is the best Stochastic trading strategy because you can identify market turning points with accurate precision.

Warning! This can turn you into a modern sniper elite trader. The Stochastic indicator will only make you pull the trigger at the right time. A modern sniper elite trader only pulls the trigger on a trade when he is certain he can pull a winning trade.

Our team at Trading Strategy Guides is developing the most comprehensive library of Forex trading strategies. Our goal is to help turn your trading around.

Our favorite time frame for the Best Stochastic Trading Strategy is the 15-minute chart. This is because we have taken the time to backtest the best Stochastic Trading Strategy.

We also tested the 15-minute TF came over and over again. If you’re a day trader, this is the perfect strategy for you. The stochastic strategy evolved into being one of the best stochastic strategies.

Despite the stochastic indicator being a very popular indicator among traders, they have been using it the wrong way. Our team at Trading Strategy Guides.com interprets the charts and the indicators in an unorthodox way. At the same time, it’s very productive.

Day trading might not be your thing, but perhaps you’re interested in trading on the higher time frames, like the daily chart. Don’t panic! We have your back. Our favorite MACD Trend Following Strategy is the best trend following strategy. For every Forex strategy, we make sure we leave our own signature and make it simply the best. You can also read our best Gann Fan Trading Strategy.

Before we move forward, we must define the indicators you need for day trading with the best Stochastic Trading Strategy and how to use stochastic indicator.

The only indicator you need is the:

Stochastic Indicator: This technical indicator was developed by George Lane more than 50 years ago. The reason why this indicator survived for so many years is because it continues to show consistent signals even in these current times.

Without further ado, let’s move straight to the point and:

  • Define what the Stochastic indicator is;
  • How to use Stochastic indicator;
  • What are the Stochastic indicator settings;

The Stochastic indicator is a momentum indicator that shows you how strong or weak the current trend is. It helps you identify overbought and oversold market conditions within a trend. The stochastic indicator should be easily located on most trading platforms.

The Stochastic indicator looks like this:

After extensive research and backtesting, we’ve found that this indicator is more suitable for day trading. Indicators, like the MACD, are more suitable for swing trading. You should really check out our amazing MACD Trend Following Strategy. We decided to share this with our trading community recently.

Another reputable oscillator is the RSI indicator, which is similar to the Stochastic indicator. We chose it over the RSI indicator because the Stochastic indicator puts more weight on the closing price. This is the most important price no matter what market you trade. This strategy can also be used to day trade stochastics with a high level of accuracy.

Let me just quickly tell you how to use the stochastic indicator and how to interpret the information given by this amazing tool so you can know what you’re trading. When the stochastic moving averages are above the 80 line, we’re in the overbought territory.

Conversely, when the stochastic moving averages are below the 20 line, we’re in oversold territory.

Please have a look at the chart example below to see how to use the stochastic indicator.

So, how does the stochastic indicator work?

The stochastic oscillator uses a quite complex mathematical formula to calculate simple moving averages:

%K = 100(C – L14)/(H14 – L14)

  • C = the most recent closing price
  • L14 = the low of the 14 previous trading sessions
  • H14 = the highest price traded during the same 14-day period
  • %K= the current market rate for the currency pair
  • %D = 3-period moving average of %K

See below where to locate the %D and %K lines:

The mathematical formula behind this method works on the assumption that the closing prices are more important in predicting oversold and overbought conditions in the market. Based on this assumption the Stochastic indicator works to give you the best trade signals you can possibly find.

Best stochastic settings for 15 minute chart

The default settings for the stochastic indicator are 13, 3, and 1.

As you can see below, we will select a length of 14 periods to start.

Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules.

Let’s get started…..

Day trading with the best Stochastic Trading Strategy

(Rules for a Buy Trade)

Step #1: Check the daily chart and make sure the Stochastic indicator is below the 20 line and the %K line crossed above the %D line.

We’re day trading, but having in mind the higher time frame sentiment and trend.

This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. Our team at Trading Strategy Guides.com has put a great deal of time in developing the best guide to Trading Multiple Time Frames – The Key to Successful Trading. The multiple time frame concept is important because it can give you a more robust reading of the current price action and more it can help you better time your entry and exit points.

Note*: On the daily chart, it’s not necessarily for the stochastic moving averages to be below the 20 level. They can be moving away from the oversold territory and the signal can still be valid, but it shouldn’t be above 50 level.

Step #2: Move Down to the 15-Minute Time Frame and Wait for the Stochastic Indicator to hit the 20 level. The %K line(blue line) crossed above the %D line(orange line).

This step is similar to the previous rule, but this time we apply the rules on the 15-minute time frame: wait for the Stochastic indicator to hit the 20 level and the %Kline (blue line) is crossing above the %D line (orange line).

The 15-minute chart is the best time frame for day trading because is not too fast and at the same time not too slow.

See figure below:

It is said that the market can stay in overbought and oversold condition longer than a trader can stay solvent. So we want to take precautionary measures, and this brings us to the next step on how to use the stochastic indicator.

Step #3: Wait for the Stochastic %K line (blue moving average) to cross above the 20 level

We want to trade smarter, right?

Well, because the %k is the fast moving average it’s enough just to wait for it to cross above the 20 level because the %D line will follow suit. We don’t want to wait too much either as this will result in a reduced profit margin.

Right now is the time you should switch your focus to the price action, which brings us the next step of the best stochastic trading strategy.

Step #4: Wait for a Swing Low Pattern to develop on the 15-Minute Chart

What is a Swing Low Pattern?

A Swing Low Pattern is a 3 bar pattern and is defined as a bar that has one preceding and one following bar with a higher low. Here is how to identify the right swing to boost your profit.

A visual representation of the Swing Low pattern can be seen below:

So far, so good, but still we haven’t answered the most important question that a trader has:

Day trading stochastics: When to Enter?

This brings us to the next rule of the Best Stochastic Trading Strategy.

Step #5: Entry Long When the Highest Point of the Swing Low Pattern is Broken to the Upside

Nothing beats an illustration…

So, after following the rules of the Best Stochastic Trading Strategy, a buy signal is only triggered once a breakout of the Swing Low Patterns occurs.

Let’s turn our focus again to the EUR/USD 15-minute chart presented earlier and see how to use stochastic indicator in combination with the Swing Low Pattern.

See the chart below:

So at this point, your trade is running and in profit.

Step #6: Use Protective Stop Loss placed below the most recent 15-minute Swing Low

You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of 5 pips away from the low, to protect yourself from possible false breakouts.

Step #6: Take Profit at 2xSL

Knowing when to take profit is as important as knowing when to enter a trade. The Best Stochastic Trading Strategy uses a static take profit, which is two times the amount of your stop loss.

See figure below:

Note** The above was an example of a buy trade using the Day trading with the Best Stochastic Trading Strategy. Use the same rules – but in reverse – for a sell trade. In the figure below you can see an actual SELL trade example using the Best Stochastic Trading Strategy.

We’ve applied the same Step #1 through Step#4 to help us identify the SELL trade and followed Step #5 to trigger our trade (see next figure).

Conclusion for this stochastic strategy:

Day trading with the Best Stochastic Trading Strategy is the perfect combination between how to correctly use stochastic indicator and price action. The success of the Best Stochastic Trading Strategy is derived from knowing to read a technical indicator correctly and at the same time make use of the price action as well. We also have training for the best short-term trading strategy.

Our team at Trading Strategy Guides.com doesn’t claim to be perfect, but we have a solid understanding of how the market works. For those of you who are not fans of lower time frames, we recommend the “Fibonacci Retracement Channel Trading Strategy” which can be more suitable for your trading style.

Thank you for reading!

Please leave a comment below if you have any questions about Stochastic Trading Strategy!

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