Learn how to use the stochastic indicator to predict reversals and momentum and combine it with the 200 ema, MACD, support, and resistance levels.

The Best Stochastic Indicator Trading Strategy

Stochastics versus RSI

One of the most popular trading indicators is the stochastics, and it is widely used because it can be applied in different ways. It can be used as a momentum indicator and can also predict reversals by detecting overbought and oversold levels in the market. The RSI indicator can also reveal overbought and oversold levels, but the stochastics tend to move between those levels more cleanly and smoothly than the RSI. Additionally, the stochastics has two lines, the K percentage and the D percentage, which provides additional signals for traders.

Using Stochastics: Watch for Trends

One of the most common mistakes that beginners make when trading with the stochastics indicator is that they place a buy position immediately when the indicator hits oversold, and a sell position when it hits overbought. However, this is not always a good strategy, especially when the market is on a strong trend. Therefore, trading against a trend is not advisable. It is best to complement this strategy with another indicator that can detect the medium-term trend, such as the 200 EMA. Thus, traders can safely trade the reversal strategy while following the trend.

Exit Strategy

There must also be an exit strategy when using stochastics. If traders are taking a buy position, they should place their stop loss below the nearest swing low and set their profit target at two times their stop loss. If traders are taking a sell position, they should place their stop loss above the swing high and set their profit target at two times their stop loss.

Combining Stochastics with Other Indicators

Traders can combine the stochastics indicator with other technical indicators to have a more holistic understanding of the market. One such strategy is combining stochastics with simple support resistance and trend lines. Traders can spot a pattern forming where the price reverses every time it reaches the trend line while the stochastics is at oversold or overbought.

The Final Strategy

A final strategy that traders often employ is combining the stochastics with the MACD indicator and the 200 EMA. Traders can take a buy position when the price is above the 200 EMA while the stochastic is at oversold, and the MACD line crosses above the signal line. Conversely, traders can take a sell position when the price is below the 200 EMA while the stochastic is at overbought, and the MACD line crosses below the signal line. The exit strategy is the same as in the previous strategies.

Conclusion

The stochastics indicator is a powerful tool for traders as it can predict reversals and provide signals for entering or exiting the market. However, traders must always look at the context of the market, follow the trend, and use stop-loss orders to minimize risk. Combining stochastics with other indicators can provide a more comprehensive view of the market, thereby allowing traders to make more accurate decisions.