You have already heard of or use one of the most popular forex indicators, the Stochastic Oscillator. The Fast Stochastic is its modified form that attempts to provide earlier indications of oversold and overbought market conditions. Here we will take a closer look at how it works and ways in which you can implement it into your trading strategy.
What is the Fast Stochastic Indicator?
The Fast Stochastic Indicator works the same way as any other oscillator. It tells you whether an asset price is overbought or oversold, compared to the price range. Take a look at the chart below:
The indicator is the same as the traditional Stochastic indicator. However, this version is supposed to be quicker when revealing the reversal conditions. I found that means there are lots of false signals unless you use additional chart analysis to confirm trades.
Fast Stochastic Strategy
There is no rocket science in trading the Fast Stochastic indicator. While placing the indicator on your chart, you will see the following settings:
The K line is the main line, while the D period is the moving average. These lines stick together with a nominal distance.
You can imply several techniques to trade using this indicator. One simple way is to buy when the indicator hits the 20 level (oversold) and sell when it hits the 80 level (overbought). You may also consider the 50 level as a pivot point. If the indicator goes above the level, you can enter long, while falling below the level is a sell signal.
The third way is a bit tricky. It’s called trading the divergence. If the price makes higher highs while the indicator forms higher lows, it shows a Stochastic divergence between the indicator and the price. It results in a bearish reversal. I would look at all aspects of the Fast Stochastic indicator before considering a position that I would still want to confirm with other market analysis.
Buy Signal
Here’s the strategy to find a long signal:
- You are recommended to choose higher timeframes for a precise entry.
- Wait until the indicator level hits 20 or below it.
- Enter when you see a bullish candlestick close with a strong rejection.
- Place the stop-loss around the swing lows.
- Place the take profit around the key horizontal levels on the chart.
- Alternatively, you can exit in profit when the indicator level hits 80.
Sell Signal
Here’s the strategy to find a short signal:
- You are recommended to choose higher timeframes for a precise entry.
- Wait until the indicator level hits 80 or below it.
- Enter when you see a bearish candlestick close with a strong rejection.
- Place the stop-loss around the swing highs.
- Place the take profit around the key horizontal levels on the chart.
- Alternatively, you can exit in profit when the indicator level hits 20.
Fast Stochastic Pros & Cons
Pros
- There are multiple ways in which you can trade with this indicator.
- The frequency of signals is plenty.
- It is not a complicated trading tool to handle.
- Can time entry in strong trends.
Cons
- The indicator is lagging and generates lots of false setups.
- Strong trends mostly ignore the oversold or overbought conditions.
- Requires traders to confirm signals.
Conclusion
The Fast Stochastic indicator is a decent oscillator that can be used as the main strategy or for confirmatory analysis. You may use your own creativity and generate a forex strategy of your own. However, be sure not to risk real money while experimenting with the tool, you could always use a forex demo account to practice your trading skills and build some confidence at first.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
