On its own the stochastic indicator may only be partially useful, but combine two of them – one slow, one fast – and something very interesting happens…
The Forex Dual Stochastic Trade is based on combining a slow and fast stochastic and looking for occasions when these two signals are at opposite extremes. Extremes are defined as the 80% and 20% levels (illustrations below give a better indication of what is meant).
The only other indicator you need to perhaps consider for this strategy is the 20 EMA, and even it is not essential. The settings for the two stochastics are as follows:
For Metatrader these settings are shown in the diagrams below (the colour choices of course are up to you):
Slow Stochastic Settings in Metatrader:
Fast Stochastic Settings in Metatrader:
n.b. In the examples given below I have combined both stochastics in the one window at the bottom of the Metatrader chart. You may find this more convenient to do, and it is easily achieved. First place one of the stochastic indicators on the chart. Second, drag the next stochastic indicator from the Navigator window in Metatrader and drop it on top of the first stochastic. The dialogue box to enter the settings will come up automatically.
The basic rules are that you:
- wait for price to be trending strongly
- watch for the stochastics indicators to be at opposite extremes
- and then for confirmation of an entry look for an appropriate candle pattern that signals a reversal after a short retracement to the 20 Ema.
Note that you can also use the mid-band of the Bollinger bands as a substitute for the 20 Ema.
To go straight to a few trade examples have a look at the following chart. These examples are from one hour charts, as this is a good time frame to trade this particular pattern on.
The circles indicate possible entries for a short in a down trend. Note how the slow stochastic (yellow indicator band) is extremely oversold and the fast stochastic (blue band) has just hooked down after being extremely overbought.
The third example is a bit borderline as the slow stochastic has begun to lift from the oversold region. On the other hand, price has just made a double top and fallen away convincingly. So this would be a judgement call for you to make as a trader.
Above: A classic short entry in a confirmed downtrend. Note how flat and oversold the slow stochastic is, combined with a near copybook fast stochastic hook down from overbought.The 20 Ema has also been touched and convincingly rejected from. The bearish candle is not a classic engulfing pattern but is confirmed by later candles.
Abve: The first circle indicates an near classic entry as price has now broken below old support and is falling away. An obvious winner. The second circle indicates a perfect evening star pattern at the 20 Ema, but taking this trade would have most likely resulted in a loss, or at least breakeven result. Just to show that the strategy is not always perfect. Of course, these trades are all drawn from history and we have no idea what was going on in the market at that time, which may or may not have influenced the sentiment.
I know several traders who bend the rules slightly when using this system and still do very well with it. It is an intuitive system, not necessarily to be used in a mechanical, robotic fashion. You should always use it in confluence with other signals, as indicated above, and always keeping in mind the time of day/session/Liquidity etc that is prevailing at the time you are trading.
In the illustration above neither example is perfect. In the first, the slow stochastic is not quite at overbought. In the second, the fast stochastic is not quite at oversold. Yet both represent convincing rejections at the 20 Ema after price has closed convincingly above an old support level indicated by the white line.
This is an example of where you may need to exercise your judgement, and as always, remember to trade with a confluence of other events and signals if they are available. The classics are:
The next in our series of free forex trading strategies is based on overlapping Fibonacci patterns. It’s called the Overlapping Fibonacci Trade