If you want to get started in forex trading then swing trading systems are a great place to start and a stochastic swing trading system can be learned in a few days and then you’re ready to make big profits…
Before we look at the stochastic indicator, let’s look at why swing trading is an ideal place for novice traders to start their trading careers.
There are two main reasons:
1. You get plenty of trades and don’t the patience of long term trend following
2. You get profits and losses quickly so it requires less discipline than trend following.
So let’s look at how the system will work.
Swing trading simply aims to take advantage of overbought and oversold scenarios, to buy oversold markets and sell overbought markets.
The stochastic is perfect for this.
Let’s quickly get the technical bit out the way and keep in mind, you don’t have to understand the maths to use it, just as you don’t need to know how an internal combustion engine works to drive a car – it’s a visual indicator, you can find on any free chart service and set ups can be spotted by anyone.
This technical indicator is based on the assumption that when a financial instrument is in an uptrend it tends to closer to the high than when it is falling, where the reverse scenario applies i.e. it tends to close near its lows.
How the indicator is plotted
The stochastic is lines the %K, which is a fast line and %D, which is a slow line.
The %K line is more sensitive than %D
The %D line is a moving average of %K.
The %D line gives the actual trading signal
Sounds a bit geeky – but just think of the way a moving average is plotted, then think about the %K as a fast moving average and %D as a slow moving average.The lines are plotted on the forex chart from 1 to 100. 80% and above is considered overbought and 20% below is oversold.
Here we are going to look at stochastic crossovers with bullish or bearish divergence, from overbought or oversold levels. A trader would look to buy when the %K line moves above the %D line and sell when the %K line moves below the %D line. The best crossover is when the following occurs the %K line intersects after the peak of the %D line, (a right-hand crossover). To cut down false signals only take signals that occur in overbought or oversold zones.
Your stochastic system would be as follows.
1. Look at support and resistance levels to key off
2. Check how over bought or oversold the stochastic is i.e. is it at an extreme?
3. Wait and hit the crossover
4. Place stop behind resistance or support
5. Look to take your profit early i.e. before it hits the next support or resistance
Simple but Effective
The above is extremely simple but all the best forex trading systems are. You may want to consider combining the stochastic with other indicators.
Combining with Other Indicators
The perfect one is the Relative Strength Index (RSI) as they compliment each other and the Bollinger Band to indicate volatility and targets.
Anyone One Can do It
Swing trading with stochastics is easy to do fun and can make huge profits so learn more about this great indicator and build your own stochastic system for currency trading success.