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Best Stochastic Trading Strategy- Easy 6 Step Strategy
Day trading with the best Stochastic Trading Strategy is the name of the strategy we’ll discuss today. As the name suggests, this is a stochastic strategy suitable for day traders. The stochastic strategy is much the same as the Day Trading Price Action – Simple Price Action Strategy.
The only difference this time around is that we incorporate a technical indicator into this strategy. Namely, the stochastic indicator. This is the best Stochastic trading strategy because you can identify market turning points with accurate precision.
Warning! This can turn you into a modern sniper elite trader. The Stochastic indicator will only make you pull the trigger at the right time. A modern sniper elite trader only pulls the trigger on a trade when he is certain he can pull a winning trade.
Our team at Trading Strategy Guides is developing the most comprehensive library of Forex trading strategies. Our goal is to help turn your trading around.
Our favorite time frame for the Best Stochastic Trading Strategy is the 15-minute chart. This is because we have taken the time to backtest the best Stochastic Trading Strategy.
We also tested the 15-minute TF came over and over again. If you’re a day trader, this is the perfect strategy for you. The stochastic strategy evolved into being one of the best stochastic strategies.
Despite the stochastic indicator being a very popular indicator among traders, they have been using it the wrong way. Our team at Trading Strategy Guides.com interprets the charts and the indicators in an unorthodox way. At the same time, it’s very productive.
Day trading might not be your thing, but perhaps you’re interested in trading on the higher time frames, like the daily chart. Don’t panic! We have your back. Our favorite MACD Trend Following Strategy is the best trend following strategy. For every Forex strategy, we make sure we leave our own signature and make it simply the best. You can also read our best Gann Fan Trading Strategy.
Before we move forward, we must define the indicators you need for day trading with the best Stochastic Trading Strategy and how to use stochastic indicator.
The only indicator you need is the:
Stochastic Indicator: This technical indicator was developed by George Lane more than 50 years ago. The reason why this indicator survived for so many years is because it continues to show consistent signals even in these current times.
Without further ado, let’s move straight to the point and:
- Define what the Stochastic indicator is;
- How to use Stochastic indicator;
- What are the Stochastic indicator settings;
The Stochastic indicator is a momentum indicator that shows you how strong or weak the current trend is. It helps you identify overbought and oversold market conditions within a trend. The stochastic indicator should be easily located on most trading platforms.
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The Stochastic indicator looks like this:
After extensive research and backtesting, we’ve found that this indicator is more suitable for day trading. Indicators, like the MACD, are more suitable for swing trading. You should really check out our amazing MACD Trend Following Strategy. We decided to share this with our trading community recently.
Another reputable oscillator is the RSI indicator, which is similar to the Stochastic indicator. We chose it over the RSI indicator because the Stochastic indicator puts more weight on the closing price. This is the most important price no matter what market you trade. This strategy can also be used to day trade stochastics with a high level of accuracy.
Let me just quickly tell you how to use the stochastic indicator and how to interpret the information given by this amazing tool so you can know what you’re trading. When the stochastic moving averages are above the 80 line, we’re in the overbought territory.
Conversely, when the stochastic moving averages are below the 20 line, we’re in oversold territory.
Please have a look at the chart example below to see how to use the stochastic indicator.
So, how does the stochastic indicator work?
The stochastic oscillator uses a quite complex mathematical formula to calculate simple moving averages:
%K = 100(C – L14)/(H14 – L14)
- C = the most recent closing price
- L14 = the low of the 14 previous trading sessions
- H14 = the highest price traded during the same 14-day period
- %K= the current market rate for the currency pair
- %D = 3-period moving average of %K
See below where to locate the %D and %K lines:
The mathematical formula behind this method works on the assumption that the closing prices are more important in predicting oversold and overbought conditions in the market. Based on this assumption the Stochastic indicator works to give you the best trade signals you can possibly find.
Best stochastic settings for 15 minute chart
The default settings for the stochastic indicator are 13, 3, and 1.
As you can see below, we will select a length of 14 periods to start.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules.
Let’s get started…..
Day trading with the best Stochastic Trading Strategy
(Rules for a Buy Trade)
Step #1: Check the daily chart and make sure the Stochastic indicator is below the 20 line and the %K line crossed above the %D line.
We’re day trading, but having in mind the higher time frame sentiment and trend.
This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. Our team at Trading Strategy Guides.com has put a great deal of time in developing the best guide to Trading Multiple Time Frames – The Key to Successful Trading. The multiple time frame concept is important because it can give you a more robust reading of the current price action and more it can help you better time your entry and exit points.
Note*: On the daily chart, it’s not necessarily for the stochastic moving averages to be below the 20 level. They can be moving away from the oversold territory and the signal can still be valid, but it shouldn’t be above 50 level.
Step #2: Move Down to the 15-Minute Time Frame and Wait for the Stochastic Indicator to hit the 20 level. The %K line(blue line) crossed above the %D line(orange line).
This step is similar to the previous rule, but this time we apply the rules on the 15-minute time frame: wait for the Stochastic indicator to hit the 20 level and the %Kline (blue line) is crossing above the %D line (orange line).
The 15-minute chart is the best time frame for day trading because is not too fast and at the same time not too slow.
See figure below:
It is said that the market can stay in overbought and oversold condition longer than a trader can stay solvent. So we want to take precautionary measures, and this brings us to the next step on how to use the stochastic indicator.
Step #3: Wait for the Stochastic %K line (blue moving average) to cross above the 20 level
We want to trade smarter, right?
Well, because the %k is the fast moving average it’s enough just to wait for it to cross above the 20 level because the %D line will follow suit. We don’t want to wait too much either as this will result in a reduced profit margin.
Right now is the time you should switch your focus to the price action, which brings us the next step of the best stochastic trading strategy.
Step #4: Wait for a Swing Low Pattern to develop on the 15-Minute Chart
What is a Swing Low Pattern?
A Swing Low Pattern is a 3 bar pattern and is defined as a bar that has one preceding and one following bar with a higher low. Here is how to identify the right swing to boost your profit.
A visual representation of the Swing Low pattern can be seen below:
So far, so good, but still we haven’t answered the most important question that a trader has:
Day trading stochastics: When to Enter?
This brings us to the next rule of the Best Stochastic Trading Strategy.
Step #5: Entry Long When the Highest Point of the Swing Low Pattern is Broken to the Upside
Nothing beats an illustration…
So, after following the rules of the Best Stochastic Trading Strategy, a buy signal is only triggered once a breakout of the Swing Low Patterns occurs.
Let’s turn our focus again to the EUR/USD 15-minute chart presented earlier and see how to use stochastic indicator in combination with the Swing Low Pattern.
See the chart below:
So at this point, your trade is running and in profit.
Step #6: Use Protective Stop Loss placed below the most recent 15-minute Swing Low
You want to place your stop loss below the most recent low, like in the figure below. But make sure you add a buffer of 5 pips away from the low, to protect yourself from possible false breakouts.
Step #6: Take Profit at 2xSL
Knowing when to take profit is as important as knowing when to enter a trade. The Best Stochastic Trading Strategy uses a static take profit, which is two times the amount of your stop loss.
See figure below:
Note** The above was an example of a buy trade using the Day trading with the Best Stochastic Trading Strategy. Use the same rules – but in reverse – for a sell trade. In the figure below you can see an actual SELL trade example using the Best Stochastic Trading Strategy.
We’ve applied the same Step #1 through Step#4 to help us identify the SELL trade and followed Step #5 to trigger our trade (see next figure).
Conclusion for this stochastic strategy:
Day trading with the Best Stochastic Trading Strategy is the perfect combination between how to correctly use stochastic indicator and price action. The success of the Best Stochastic Trading Strategy is derived from knowing to read a technical indicator correctly and at the same time make use of the price action as well. We also have training for the best short-term trading strategy.
Our team at Trading Strategy Guides.com doesn’t claim to be perfect, but we have a solid understanding of how the market works. For those of you who are not fans of lower time frames, we recommend the “Fibonacci Retracement Channel Trading Strategy” which can be more suitable for your trading style.
Thank you for reading!
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Multiple Time Frames Indicators Series – Stochastic is a Big YES!
You wanna know a secret? I have an indicator that is actually called Holy Grail 1.6… yeah that’s right, it really exists, but I am not going to give it to you. Not because I’m cold-hearted, but because it’s one of the crappiest indicators ever built. What I am going to do instead, is give you what I consider to be the real Holy Grail of trading or at least the closest thing: Multiple Time Frame Indicators (MTF). Trading a single time frame is like driving a car and looking 1 meter ahead, while trading using MTF is like lifting your eyes, looking 100 meters ahead and seeing the bigger picture. Some big players wouldn’t like you to have this info so make sure you read this article before it gets taken offline. Just joking… or am I?
What Are MTF Indicators And How To Use The MTF Stoch
Even if today we are going to talk just about the MTF Stochastic, you should know there are many others and those will be discussed in future articles. Ok, the concept of Multiple Time Frame indicators is pretty easy to understand and I will keep it as simple as possible while still giving you all the needed details. Basically a MTF Stochastic allows you to see a higher time frame Stochastic on a lower time frame chart; in other words, you can see a 15 minute, 30 minute or an hourly Stochastic in your 5 minute chart. Check this out:
Trading Forex, CFD, Crypto And BO With MTF Stochastic
The chart above is a 5-minute chart and the first Stochastic is a normal one, with settings of 11, 3, 3. The hourly Stoch (the one in the lower window), with the same settings, shows us where the market is headed on a higher time frame (in this case Hourly time frame) so now that we know where the market is headed, we can join that direction once the 5 minute Stochastic reaches an overbought/oversold condition and crosses in the direction of the higher time frame Stochastic. Here’s another way of explaining it: Hourly Stoch is moving upwards, with the 2 lines nicely spread apart and the 5 minutes Stoch agrees with its direction and exits oversold, going upwards. If you don’t get it, read again and again and again until you do because this may very well be your ticket to giving your boss the finger… if that’s what you want. If you still don’t get it, look at the picture below which shows a couple of BO trades. Keep in mind, the process of entering the trade is the same for all types of trading (FX, CFD, BO, etc.), just the name is different (Call/Put for BO and Buy/Sell for everything else):
If you are trading BO, use an expiry based on the asset’s movement speed, momentum, time of day and overall volatility. Usually, the price will go in the indicated direction within 2 – 5 candles if the trade is successful.
If you are trading Forex, CFD or Crypto the entry conditions are the same but you also have to worry about Stop Loss and Take Profit placement. The MTF Stoch gives a signal after a retracement in a trend and this type of trade requires a small Stop Loss, which should go behind the retracement that created the signal. For Take Profit you can either use a 1:2 or even 1:3 RR, or close when the lower time frame stochastic reaches the opposite side of its range.
Here’s another trade example:
You see how every time the Hourly Stoch shows me where the market is going? Do you SEE THE MONEY? Let the higher time frame Stochastic guide you and only trade in that direction when its lines are clearly spread apart. Piece of cake!
Why Does MTF Stoch Suck?
Tough question… if this tool sucks, I don’t know what doesn’t. The only problem I know of is this: if you are using an Hourly Stoch, its lines will still move until the hourly candle is finished. That is not repainting; it’s just the way MTF indicators work, but it’s something you must be aware of. Anyway, once the candle corresponding to your higher stoch is over, the indicator will be locked i.e. its lines will not move anymore (an hourly Stoch will be locked in when the hourly candle closes; a 4H Stoch will be locked in once the 4H candle closes, etc.).
Why MTF Stoch Doesn’t Suck?
The entire article so far explains why MTF Stoch doesn’t suck but here goes: it shows you the direction of the market according to a higher time frame and allows you to use other tools in order to find a good entry. As long as you know the real direction of the market, finding a good entry is secondary. Just make sure you use the right combination of time frames because a Weekly Stoch displayed on a 1-minute chart is more than useless. Time frame combinations must be carefully selected, but I will let you have the pleasure of finding the best combination… I know nobody wants to be spoon-fed, right?
So Is This The Closest Thing To The Holy Grail? Definitely!
Always keep in mind that this article reflects my opinion, formed over the course of years, but although MTF analysis is a big part of my trading, I don’t recommend you to use it just because I like it. What I do recommend is to take a good look at your charts, to think about it and to decide what is best. I also recommend testing this concept, understanding it. It might just be the next best thing since sliced bread… and I’ll leave it at that… I already revealed too much. Just joking… or am I?
Trading Time Frames With Stochastic
I was often asked the question: what is the best time frame for a swing trader?
Truly, the best swing trading time frame is relative to each trader. However, most
beginner swing traders only use the daily chart. Nevertheless, as those new swing
traders begin to gain more experience, they abandon the daily chart, and switch to
the weekly chart. Truly, it is better to be a weekly chart swing trader.
Furthermore, a professional swing trader should be able to swing trade on any time
frame higher or equal to the daily chart. Moreover, the key to a successful swing
trading is to know how to combine the top-down trading method, and trading
triangle. A swing trader should endeavour to master the different times frame
trading method. Surely, by mastering the top-down trading method, a swing trader
can compete with more experience technical traders in the financial markets without
losing his shirt.
What Is Your preferred Swing Trading
Without doubt it has to be the monthly chart. My first preference before the weekly
chart is the monthly chart. One may say that: so you do not swing trade on the daily
chart? Surely, I do, but I like to use moving averages on the daily chart in conjunction
with the monthly chart key levels.
One can also argue that there is no such thing like best swing trading time frame, but
only one own best swing trading time frame.
Yes, it all comes down to what time frame one is using more successfully.
So I will argue that one should try various higher time frame until one. identifies
the most reliable and profitable time frame.
One should always remember the first two important things for a profitable swing
trading are the top-down trading method and trading triangle.
Why Am I More Of A Monthly Chart Swing Trader?
I like the monthly chart because it helps to check on the daily and yearly charts swing
traders. Indeed, the signal time frame for the monthly chart is the daily chart. So there
is a high chance when the monthly chart swing trading signal is activated on the daily
chart, some daily chart swing traders will use that signal as a swing trading set-up.
Furthermore, the monthly chart is also the signal time frame for the yearly chart traders.
In every case, if my monthly chart trading set-up coincides with the yearly chart position
traders’ signal, they too will be getting ready to enter a position trade. Both yearly and
daily charts technical swing traders are effectively helping the monthly chart swing traders.
Therefore, those are few reasons why I prefer the monthly chart. Nevertheless, that does
not make the monthly chart the only best time frame for swing trading.
Do You Only
Swing Trade The Monthly Chart?
Not all. I can swing trade on the daily, weekly, quarterly and yearly charts.
Once, one has mastered the different times frame trading, one is free to select one own
best swing trading time frame. It is all down to your trading style, and what is working
best for you after testing various swing trading strategies on
different times frame.
Should One Swing Trade On The Daily Chart?
Yes, but one must always connect the daily chart to the higher time frames (preferably
the monthly chart) by using daily moving averages, and higher times frame’ key levels
and channels. We will be talking about how to connect the daily chart to the higher time
frames on YouTube or in another article.
Reason why many swing traders do fail
1/ The first reason is because they think it is easy to swing trade, but the reality is far from
it. As a swing trader, one must master how to combine the top-down trading and trading
It is not as easy as many may think.
2/ The second reason is because most new swing traders do not give themselves enough
time to master how to swing trade.
Give yourself enough time to learn how to combine different times frame trading and trading
triangle. For one trader, it may take up to six months, but another swing trader may take nine
months, a year or more. The question is are you ready? Have you mastered swing trading like
If not, do not be discouraged. Continue to improve steadily.
3/ The third reason is that many traders are truly day traders, but they believe that they could
do better as a swing trader.
Are you a typical day trader or swing trader? Do you make more better trading decisions when
day trading than swing trading? Those are the questions one should honestly answer.
4/ The fourth reason is because many times a new swing will repeat the same old swing trading
errors without knowing or doing anything about it. Are you in that situation? Start doing
something about it.
Always review every trade, and most importantly, the losing ones. Note down the mistakes, and
find out the best way to fix them. Upgrade your ability to swing trade bit by bit by handling past
Apart from those reasons, one should also learn how to set stop-loss correctly as a swing trader
or use put and call options for swing trading. Also be sure there is enough money to fund the swing
trade. Take the correct step to manage your swing trades. Do not place too many swing trades at
once if you are still learning. Like a
farmer checks the seasons before he sows a seed, align your swing trading strategy with the
Other Weird Swing Trading
Professional swing traders that dislike the daily chart use instead 2-day or 3-day charts. The
TC-2000 trading software allows swing traders to use 2-day and 3-day chart.
Other swing traders also use 2-week or 3-week chart instead of the weekly chart.
Those who do not want to use the monthly chart use 4-week chart because a normal monthly
chart may be formed of five weeks (week as five days week instead of seven).
What Usually Happens?
A typical swing trader usually begins to swing trade on the daily chart because he does not yet
grasp the multiple view points chart analysis ( or chart analysis from different angles). Therefore,
he is happy with the daily chart for now. However, as he or she is understanding more what swing
trading like a pro is all about, he begins to check the weekly chart though he is still using the daily
chart swing trading set-ups. He is maturing like a child that is growing without noticing it. During
that learning curve, his eyes start opening more widely, he can see clearly and spot better trading
opportunities on the weekly chart. Consequently, he or she will say something like this: I would
rather use the weekly chart instead of daily. From now on, he will be looking for swing trading
set-ups on the weekly chart. Then one day, he wonders what is a top down trading method. He
thought it would be amazing to connect multiple or different times frame. In the end, he switches
to the monthly chart because he can now connect the monthly, daily and hourly chart like a
professional trader. Now the sky is the limit, nothing can stop him or her any more. He is turning into
a fully fledged swing trader, and he knows it.
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