68# Stochastic Forex Trading System

Submit by Janus Trader (Written by Forex Soho)10/01/2012

 

Time frame: daily

Currency pair: any
Trading setup: SMA 150,
RSI (3) with horizontal lines at 80 and 20,
Full Stochastic (6, 3, 3) with horizontal lines at 70 and 30.

Trading rules:
Entry for uptrend: when the price is above 150 SMA look for RSI to plunge below 20. Then look at Stochastic – once the Stochastic lines crossover occur and it is (must be) below 30 – enter Long with a new price bar.

 

If at least one of the conditions is not met – stay out.
Opposite for downtrend: when the price is below 150 SMA wait for the RSI to go above 80. Then if shortly after you see a Stochastic lines crossover above 70 – enter Short.

Protective stop is placed at the moment of entry and is adjusted to the most recent swing high/low.


Profits are going to be taken next way:
Option 1 – using Stochastic – with the first Stochastic lines cross above 70 (for uptrend) / below 30 (for downtrend).
Option 2 – using a trailing stop – for an uptrend a trailing stop is activated for the first time when Stochastic reaches 70. A trailing stop is placed below the previous bar’s lowest price and is moved with each new price bar.

This strategy allows to accurately pin-point good entries with sound money management – risks/protective stops are very tight and potential profits are high.
Current trading strategy can be improved when it comes to defining the best exits. For example, once in trade traders may also try applying Fibonacci studying to the most recent swings. This way they can predict short-term retracements and make sure they will not be pulled out of the trade early and will continue pursuing profit targets at Fibonacci extension levels.



RSI and Stochastic indicators can be found on almost any trading platform. The red highlighting we’ve added to our illustration is not a part of those indicators but rather a visual aid for readers.
So, you would open your charts and:
1. Add study – RSI with settings 3, 80, 20.
2. Add study – Full Stochastic with settings 6, 3, 3.
Horizontal lines can be added afterwards.

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