Best forex indicator combination: Stochastic oscillator and Awesome indicator

Author: Consultant Finmaxfx

Some trading approaches do not need for a long-term perspective outlook. The intraday trading technique allows getting a stable profit with low risks. One of the advantages of such a view is that traders do not need to care a lot about the general trend, wasting too much time for analysis instead of trading. The key question for any intraday trader is to identify the best moment to enter the market, as every single day trading cycle has several active periods when the market activity, volatility and trend momentum rise. It is well known that momentum changes before the price itself, signalling an upcoming price action whether it will be a reversal or continuation technical pattern. So before making any trading decision, it is worth looking at technical tools which indicate momentum.

How to combine the best Indicators?

Technical indicators traditionally have different purposes in their formulas, that is why they are often used in pairs. For instance, Stochastic and Awesome Forex trading strategy is based on two oscillators, as it is easy to understand from its name. Stochastic oscillator is used to find entry points, while Awesome oscillator indicates the perfect time to get out of the market. Take your money and run - that would be the best slogan describing this strategy. It can be used with any currency pair, however, it is been tested on several most accurate assets from the technical point of view: GBP/USD, EUR/USD and GBP/JPY. Although, traders are free to choose. Timeframes are intraday: 15M, 30M, 1H and 4H. It would not be a good idea to use shorter timeframes due to the huge number of false signals as well as potentially low profits. Daily and weekly timeframes also have a much more efficient technical tool to analyse, so let is just leave them apart so far.

There is much misunderstanding of technical indicators out there. Traders tend to use many indicators without researching or knowing what they are and how are they calculated.

Before describing signals conditions, we had recommend to figure out the nature of both oscillators in order to have a better understanding of the principles they use for the trading signals to happen. First, Stochastic oscillator, measure the market momentum, as well as oversold and overbought levels. It has two lines, however, we are interested in the mainline only for this trading system. We also prefer to change the default settings in order to increase indicator is efficiency: K%=10, D%=3, Slowing=3. As long as we are looking for trading periods with strong trend momentum (even if it is very short-lived through), the entry signal occurs when the main Stochastic line crosses 60% level from downside for uptrend and 40% from upside for downtrend. It is not news that any oscillator shows an uptrend confirmation when it is above 50% and a downtrend is reinforced when Stochastic main line falls below 50%. As simple as that.

But experienced traders know that entering the market is just a half-way for the profit at the end of the day. Next step is to find the best exit point. On one hand, we need our profits to maximize, on the other, we do not want to get trapped. So, traders, who prefer deep stop-loss orders should just close this page, as Stochastic and Awesome strategy uses ultra-tight stop-loss approach: 3-5 pips below the lower rate of the entry candlestick for long positions and the same distance above the highest rate of the entry candle for shorts. Let me guess your next question: when do we take profit?

Profit with Awesome Oscillator

Once it changes its outlook, we get out of the market immediately. Meaning that if we have an open long and Awesome oscillator posted a red bar on the histogram. That is it, we close the deal manually by the market price once the candle closes. Short positions have the same conditions but in the opposite. We take profit from the shorts when Awesome oscillator closes the current bar in green (above zero). The technical and mathematical explanation of that is included in Awesome is formula, as it measures the difference between two simple moving averages with different periods: 34 and 5. If the close price of every next bar has a strong divergence with the general trend, that will be immediately shown by the Awesome histogram, pointing that it is time to run away with the cash until it is too late.

If you like this strategy, you might also be interested in this Bill Williams Alligator

The intraday one-hour EUR/USD chart below illustrates Stochastic oscillator and Awesome indicator in action:

Stochastic oscillator and Awesome indicator
See also:
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