Financial markets always have different trading conditions. Some traders prefer to wait for an active period when price action goes wild, volatility jumps and average distances in pips increase for traditionally slow-moving currency pairs or other assets. Such periods are lucrative in the scope of profits as the market jumps and drops several times, changing the trend direction, or goes in one way for quite a while, allowing speculators to gain on sharp shifts in the trading conditions. Those moments usually come together with significant fundamental events, news or economic reports, which influence investors’ sentiment. However, they are quite rare.
Most of the time, markets are quiet, and quotes do not go crazy, ticking one or two pips. The trading activity is much lower in this case, therefore, currency pairs are much more predictable than in wild periods. Even though profits are more moderate in thin trading conditions, it’s much easier to control risks, and the technical analysis works much better. For example, fake breakouts are almost absent; financial instruments do not stay in overbought/oversold territory for so long, bouncing off significant resistance/support levels even intraday. That’s precisely the name of the strategy when it comes to choosing timeframes. Intraday trading became popular in the FX market as it gives an opportunity for retail traders with comparatively small account balances to gain on minimal price changes on 15-minutes, 30-minutes and one-hour charts. We’ll consider those three charts today.
Choosing the most suitable currency pair is one of the critical steps to success. On the one hand, major pairs such as EUR/USD and USD/CHF are too slow, while crazy exotics like USD/ZAR are wild and unpredictable. Therefore, we’d recommend using several pairs with moderate volatility and avoid too active periods for this trading system. For example, majors like GBP/USD, USD/JPY, AUD/USD and NZD/USD are perfect for Stochastic oscillator. Cross rates are even better: EUR/GBP is the most liquid cross-rate, by the way. It allows traders to make accurate forecasts also though profits are comparatively low in pips. Other cross rates to watch are GBP/CHF, GBP/NZD, EUR/CAD, EUR/AUD. An example we’ll show is based on EUR/GBP one-hour chart.
Before we start a practical test, we should describe entry conditions. As you could already guess from the name of the system, we’ll use Double Stochastic oscillator, which is one of the most popular fast-moving technical indicators. The first one will be fast with parameters 8,5,3, and the second one will be slow with settings 14,7,3. Both oscillators should have oversold levels at 80 and overbought territory at 20. The main idea is to look for a trading signal from the fast one but wait for a confirmation from the slow one before pulling the trigger. Such an approach increases the reliability of the trading system and allows traders to avoid false signals.
As long as the Stochastic oscillator has two lines, we need to find a crossover to consider entering the market. Also, we’ll use the rule of ‘buy cheap and sell expensive’, meaning that we need to find a crossover in overbought zone to open a short position, and we go long on a crossover of Stochastic when it’s oversold. An essential condition is that both fast and slow oscillators have to be below/above the threshold. Of course, the first signal comes from the fast Stochastic; we ignore it and pull the trigger when the signal comes from the slow one. The difference in time between two events does not have to exceed four/five bars.
Exit conditions are different depending on individual trading strategy and money management rules. Nonetheless, it’s recommended to rake small profits and run as we are talking about the intraday trading approach here. For the currency pair that we use to show an example - EUR/GBP - 20-30 pips (four-digit quotes) is a perfect take-profit distance to exit. Stop-loss orders should be twice lower than that. Therefore, traders should assess pivots points on the price chart before entering the market. If potential loss would exceed 10-15 pips, then it’s not recommended to open positions. An example of the Double Stochastic Forex Trading System is shown below.