Creating a Forex trading strategy does not have to be a difficult process. Today we will review a simple Stochastics strategy for trending markets. When choosing a trading strategy, new traders often become confused by all the variables and indicators available to consider. Ultimately the key to trading success is finding a simple strategy that you understand, and have the ability to replicate.
Today we are going to review the basics of creating a simple strategy by finding the trend then applying the Stochastics Oscillator. Before we enter into any trade, we need to find market direction by trend identification. We can see the pair is making new highs while establishing higher lows.
This analysis can be confirmed by the use of a SMA. Traditionally traders are bullish when price is above the SMA and bearish if price resides under the indicator. If the trend continues, prices are expected to make higher highs. Once market direction is identified, we can then use an indicator to enter into the market.
Since we are only looking to buy in an uptrend, it is important to identify areas where the market is oversold. The Stochastics indicator marks this with the 20 level running horizontally along the indicator. Below you will find several sample entries using Stochastics. The arrows below price have been included on the chart to better understand where execution may occur. Now that a trade has been opened, traders need to have a plan to exit the market. This is the final step in developing a successful strategy!
However, if you are already using the Stochastics Oscillator for entries, you can also use it to plan your market exit. If we are buying on a return to bullish momentum, traders should conclude buying when momentum subsides. The green arrows below have identified where our sample trades would be closed using this technique. Regardless of the methodology chosen, it is always important to have a plan to exit the market.
Once you have this final component in place, you then proceed to test your strategy live in the Forex market. Been trading FX but wanting to learn more? Been trading other markets, but not sure where to start you forex analysis? Register and take this Trader Quiz where upon completion you will be provided with a curriculum of resources geared towards your learning experience. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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