A ton of merchants underrate the viability and straightforwardness of swing exchanging utilizing the stochastic oscillator. One of the best ways to tell if a currency is overbought or oversold is with the stochastic indicator. You can take advantage of a trend’s reversal by using this indicator to identify when it is about to reverse.
This strategy works like this:
We are simply taking advantage of trend reversals, as previously mentioned. When a currency is overbought, we sell or go short, whereas when a currency is oversold, we buy or go long.
For this kind of strategy, the stochastic oscillator is the best indicator. However, before we get into the strategy itself, let’s get a technical explanation out of the way first. This is merely a visual indicator, so you don’t really need to know the formula. To help you understand how this oscillator’s “engine” functions, the formula is provided.
This technical indicator is based on the assumption that a reversal that will push a currency’s price lower is about to occur as it gets closer to the 100 percent moving average. The same holds true as the price approaches the 0% moving average, where a reversal will result in a price increase.
Plotting the indicator as follows:
There are two lines in this oscillator: the slow line, which is the %D, and the fast line, which is the %K. The slow line, which is slower, makes the %D line less sensitive than the fast line.
The trade signal is provided by the %D line, which is a moving average of %K.
The absolute highest and lowest points that a currency can reach are denoted by these lines on your chart, which run from 0 at the bottom to 100 at the top. There is a line at the 80% mark and a line at the 20% mark within those two lines. At the point when the cost goes over the 80%, it is thought to be overbought, and, when it goes underneath the 20%, it is thought to be oversold.
Now, let’s use the signals to trade:
1. It is essential to know where your support and resistance levels are.
2. Examine the degree of the overbought or oversold move.
3. Before entering the trade, you should wait for confirmation of the actual crossover of %K and %D in both your fast stochastic and slow stochastic.
4. Use the resistance and support lines to determine your stops before entering them.
5. Profit quickly before the subsequent reversal. The following crossover could serve as your “take profit” signal.
6. Actually, this is a lesson I learned many years ago: don’t get angry if you exit too early and lose money. Remember that you are never going to lose cash by taking benefits regardless of how little the benefit might be.
As you can see, this tactic is extremely effective despite its simplicity.
The stochastic oscillator should always be used in conjunction with other indicators. With stochastic, the Relative Strength Index and Bollinger bands work extremely well.
Trading becomes fun when you use an easy swing trading strategy like the one we talked about because you don’t have to worry about putting your strategy into action and you still make a lot of money!