Trend Following with Stochastic

Trend Following with Stochastic Oscillator

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The trend following stochastic forex trading strategy is an easy to understand yet profitable strategy to trade currencies. The only tools we need in order to apply this method is the stochastic indicator, ATR(14) and trend lines.

Setup

Preferred Time Frame’s: 30 min and above

Recommended Trading Sessions: Any

Pairs: Any

Indicators:

  • Stochastic Oscillator (5,3,3)
  • Average True Range ATR (14)

Rules for a Short Trade

  1. Find a down trending market and draw a falling trend line connecting the successive temporary resistance tops.
  2. Wait for the price to rally towards the falling trend line.
  3. Go short in the vicinity of the falling trend line if the Stochastic Oscillator turns negative from overbought market conditions.
  4. Place stop 3 pips above the most recent level of resistance.
  5. Trade objective: 50% of 14 day average true range (ATR).

Rules for a Long Trade

  1. Find an up trending market and draw a rising trend line connecting the successive temporary support bottoms.
  2. Wait for the price to pullback towards the rising trend line.
  3. Go long in the vicinity of the rising trend line if the Stochastic Oscillator turns positive from oversold market conditions.
  4. Place stop 3 pips below the most recent level of support.
  5. Trade objective: 50% of 14 day average true range (ATR).

Trading example (GBP/USD 1 Hour Chart)

Trend Following with Stochastic

The gbp/usd is in an up trend supported by the rising trend line. The price pulls back towards the rising trend line while the Stochastic Oscillator turns positive from oversold market readings (below 20).

We open a long buy at 1.5590 with stop 3 pips below the most recent level of support at 1.5590. Our trade objective is 50% of ATR which is 75 pips. The trade was closed about 4 candlesticks later at 1. 5690 for 75 pips while the risk was only 25 pips (+ spread).