The stochastic indicator shows over bought/over sold status in the market, I have found this indicator give a good edge on the market if used at the correct time. On the stochastic indicator you should see two horizontal lines, one at 20 and one at 80. These two lines are our trigger lines, we will be using them for entries into the trade.
As you may have herd many times before if you want a low risk trade you must trade with the trend and that is exactly what we are going to do.
Plot the following weighted moving averages on your chart. 5,10,20,30,40,50,60,70,80,90,100,110,120,130,140,150 this will create a pretty looking wave of moving averages. Set them to whatever colour you like just make sure you can see the price action through them ok.
Use the moving averages to give you a clear view of what the trend is dong the 150 being the long term trend and the 5 the shortest tern. You will notice that the 5 wma will retrace back towards the larger wma's very ofter in a trending market.
What we are looking for is this to happen while the stochastic indicator is oversold for a up trend and overbought for a downtrend. The entry for the trade is when the stochastic crosses back over ether of the horizontal lines.
For example: all moving averages are clearly in a downtrend, price makes a retrace back into the moving averages and the stochastic indicator moves into the overbought area crossing the 20 horizontal line. Once the stochastic indicator curls over and crosses the 20 line again heading for the other side, you wait for the close of the current candle and enter your trade.
Use small stops and let profits run with a trailing stop.
Simple but it works!
By Dean Saunders
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