The stochastic oscillator can do a great job of spotting currency pair trends and momentum. You can use it to identify the start and end of a current trend, along with overbought and oversold market conditions. If it can be a good filter for trades on its own, adding another stochastic to for a double stochastic strategy can help to give additional confirmation on your trades and hopefully improve your entry and exit into the market. We can then further improve upon the double stochastic signals by using additional technical indicators and price action analysis such as candlestick patterns to time our trades.
What is the stochastic oscillator?
The stochastic indicator is a two-line indicator that can be applied to any chart. It fluctuates between 0 and 100. The indicator shows how the current price compares to the highest and lowest price levels over a predetermined past period.
The default setting for the stochastic oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods.
The stochastic oscillator is displayed as two lines. The main line is called “%K.” The second line, called “%D,” is a moving average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line. There are several ways to interpret a stochastic oscillator.
How to use double stochastic indicators?
The stochastic oscillators can show overbought market conditions when it is above 80 or oversold market conditions when it is below 20. When the stochastic main line crosses the signal line up, this is considered to be a buying signal. When the stochastic main line crosses the signal line downwards, this is considered to be a selling signal. If the cross happens in the extreme 20 or 80 zones, the signal might be considered even more powerful.
For instance, if we see a stochastic crossover to the upside and the stochastic is below the 20 level, the market might be oversold and starting to turn upwards. If the downwards cross happened above the 80 level, the market could be overbought and about to start trending down. If 2 stochastic with different settings both agree, this could be considered a more powerful signal compared to using just one stochastic indicator.
Then we can look at stochastic divergence. A divergence occurs when the indicator doesn’t move in-line with price. For example, the price makes a new high, but the stochastic fails to reach a new high. Or, price makes a new low, but the stochastic fails to make a new low.
The double stochastic oscillator is a separate indicator that you might want to check out. It can also be useful for determining trend reversals and market trends.
Double stochastic forex trading strategy
The double stochastic strategy combines all elements that we discussed above, the crossover, extreme levels and divergence. We use a 50-period moving average to decide the direction we will look for trades so that we trade in line with the trend. If price is above the moving average, we will look for buy signals. If price is below it, we will look for sell signals.
I personally would not take the double stochastic signals without confirming each buy or sell trade with additional market analysis. I would want to check support and resistance levels and other indicators to make sure they agree with the setup. This can help to avoid false signals and allows us to time our entry that little bit better which can make a big difference when it comes to where we place the stop loss.
In theory, you could use the double stochastic strategy on any currency pair and chart timeframe. I find the major currency pairs such as the EUR/USD tend to have the most liquidity so you can catch some big moves. I also prefer the 1-hour charts and above as there can be too much market noise on the lower chart timeframes such as the 1-minute and 5-minute charts. This can lead to more false signals.
- Price is above 50-period moving average
- Stochastic (5,3,3) main line is above signal line
- Stochastic (10,3,3) main line is above signal line
- Stochastic (5,3,3) is around oversold 20 zone
- Stochastic (10,3,3) is around oversold 20 zone
- Stochastic (5,3,3) is showing bullish divergence (optional)
- Stochastic (10,3,3) is showing bullish divergence (optional)
- Bullish price action
In the EUR/USD 1-hour chart below you can see that the price is above the 50 SMA and breached a recent resistance level. The double stochastics are both showing an uptrend crossover around the oversold zone. We also have a strong bullish engulfing bar that contains many red bars which is another indication that an uptrend may be commencing. Stop loss could have been placed just below the 50 SMA which would have been around 50 pips. The uptrend continued for around 250 pips if we exited the position when price closed back on the other side of the 50 SMA.
- Price is below 50-period moving average
- Stochastic (5,3,3) main line is below signal line
- Stochastic (10,3,3) main line is below signal line
- Stochastic (5,3,3) is around overbought 80 zone
- Stochastic (10,3,3) is around overbought 80 zone
- Stochastic (5,3,3) is showing bearish divergence (optional)
- Stochastic (10,3,3) is showing bearish divergence (optional)
- Bearish price action
You can see from the EUR/USD 1-hour chart below that price is below the 50 SMA. The double stochastics are showing downtrends and not in the oversold area. Price has recently breached support and has formed a new resistance level. There are bearish candlestick patterns including an evening star. We could have placed the stop loss just above the 50 SMA which would have been around 50 pips. That’s not bad when you consider the downtrend went on for over 200 pips. A good exit point would have been when price closed back above the 50 SMA, which we could have also used as a trailing stop loss.
Double stochastic strategy Pros & Cons
- Can be used on any chart timeframe
- Can be use on any currency pair
- Stochastic indicator is free to use
- Easy to interpret trading signals
- Can spot market trends and reversals
- Can gauge market momentum
- Can combine with other indicators
- Needs additional confirmation
- Requires good money management
- Need to time entry and exit
- Will be false signals
Conclusion: is the double stochastic strategy any good?
Yes, I think the double stochastic strategy is very powerful when implemented correctly. Of course, just like any forex strategy, it will require the user to have good forex money management and trading discipline. This can be the difference between good and bad performance, no matter how amazing the strategy you are using is.
If you want to test the double stochastic strategy, you could always start on a demo account and see how it goes. You can get a free forex demo account loaded with virtual funds from most forex brokers. This can be a great way to build confidence and practice your trading skills before making any commitment.
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