5.10 Stochastics indicator trading instructions Video Lecture | Forex: Learn and Master Trading (English) - Business Basics

higher welcome back to capex forex
trading comm in this video we're going
to focus on the stochastics indicator
which is a great tool to use when
looking to recognize overbought and
oversold areas of a trend now you can
see in the bottom window here that the
indicator is made up of two lines one is
called the percentage K line and the
other is called the percentage D line
now don't worry about what that means
you don't really need to know about that
but one thing you do need to bear in
mind is that the standard setting for
stochastics is 14 3 3 so the 14 is
relative to the number of last trading
sessions so when we have the setting of
14 the indicator will take into account
the last 14 sessions in your chart and
the two-threes that we see at the end
here are basically the measurements for
or the settings rather for the
percentage K and the for the percentage
B line now you will see on the
right-hand side here a vertical scale
that ranges from 0 to 100 but you will
also see a couple of levels emphasized
that those levels are 20 and 80 and to
simplify everything when the stochastics
indicator is above 80 that means that
the trend is overbought and when it's
below 20 it means that the trend is
oversold however we do get a lot of
false measurements so what we need to do
with the stochastics indicator is
combine it with another one so in order
to increase the reliability of the
stochastics indicator we need to use a
200 period exponential moving average
and in general terms when the
exponential moving average is sloping
upwards and prices are above it we're
looking to trade in the upwards
direction however when the EMA is
sloping downwards and prices are below
it we're looking to trade in the
downwards direction so by combining this
de castex indicator and the 200 EMA
we're not looking to trade against the
trend we're only looking to trade in the
direction of the trend itself so when
we're trading an uptrend the first thing
we're looking for other than the price
is being above the 200 EMA of pullbacks
now pull backs are simply areas of the
uptrend where the uptrend is kind of
running out of steam and is looking to
regather as
to continue back in you it was direction
so just with a couple of examples we've
got an uptrend here and then we've got a
pullback there and then the continuation
back in the upward direction then we've
got another pullback and another
continuation back in the upwards
direction then we've got another
pullback here and then another
continuation in the other direction and
so on so these pull backs are actually
really important for us when we're
looking to trade stochastics and what we
need to see our oversold positions
within those pull backs in order to take
an entry for a continuation backing it
with direction so I'll explain that a
little bit better so we've got this
pullback with this pullback area here
the uptrend that we're focusing on is
this so we've got this pullback here and
at the same time the stochastic
indicator you can see is showing an
oversold position great so I'm just
going to place a little vertical line
there too to emphasize that for us now
the one thing that we need to do before
we take that trade is to make sure that
the low in our price chart is a higher
low to the previous low where the
condition was oversold so you can see
that the last oversold condition it
wasn't this here it was here
okay so this is our over sells position
so we got oversold position number one
and we're going oversold position number
two you can see that the lows if I join
them up and just going to move these out
the way so it's a little bit clearer to
see we've got the loads joined up now
one two
this second low is higher than this low
which means that the continuation is
imminent so this is where we take our
trade however don't just take the trade
as soon as the oversold position occurs
for the second time round you need to
wait for the lines to cross back over
the 20 line and make sure that the
percentage K and the percentage D lines
have crossed over as well and you can
see how quickly that shot back up in the
upward direction because the next target
is the next major previous high so our
target will be this okay and that's
there how many pips so we've got here
we've got 175 pips in literally in a day
that's how you would use the stochastics
indicator to trade in the upwards
direction the same rule applies when
we're trading in the downwards direction
but in Reverse right so what we've got
here is a downtrend and then a major
pullback and then a continuation
continuation back in a downward
direction now we've got two oversold
positions here we've got one here and
one here and the highs that correlate
with those two positions is high number
one here and high number two here so a
200 EMA is still sloping downwards and
prices are trading below it and that's
great so what we're looking for is for
that second high sort of sorry that
second low to be below that first low in
conjunction with the overbought
positions that we see in a stochastics
indicator so we wait for the cross under
the 80 line now and we would enter in
this candle here and our target is the
previous low okay so that is simply how
you trade that in terms of our stop
losses when we're trading we'll just
delete this out of the way
we've got a high here the stop-loss is
simply just a few pips above that high
or if you want to give you trade a lot
more room then you need to just look at
the next previous high which is this one
here and just place your stop-loss just
a few pics below above that if we take
the same trade that in terms of our
example that we used earlier we would
take either a put a stop loss either in
this area just a few pips below the low
or we would look for the next lower low
and we would praise the place a stop
just a few pips below it to give a trade
give our trade a bit more room to move
now the second way which we can use the
stochastic indicator is by using
divergence and remember from our
previous videos divergence is simply
where this the indicator and the prices
are trading in two separate opposite
directions
so when we trade when we use divergence
we don't actually need the the 200 EMA
so I'm just going to delete that out the
way and as you can see here what we've
got are two
one two three rather got two highs there
are pretty much kind of halted at the
same level but the stochastics indicator
is trending downwards okay so despite
the fact that we've got highs that are
at the same level at the top here the
stochastic indicator is showing us that
the strength of those highs is
completely decreasing so the trade or
the the entry that we would take would
be at this level here which is relative
to this lower high in this de castex
indicator and our target is simply the
next previous low which is this low here
so in terms of our profit we're looking
at about one hundred and four pips with
a stub plus that's simply above the high
that you traded of thirty-one pips so in
terms of our risk reward that is a a
very very good trade to take and the
last way in which we can use this
indicator is by identifying trend line
breaks in the in the price chart so if
we get just draw a line here that
basically identifies for us and uptrend
so we've got a hit here and a hit here
then we've got a trend line break here
in this area the only thing that we need
to we need a stochastic indicator to do
for us is tell us is this fall of prices
here has it come from an overbought
stochastics position and if we look at
the high here and then relate that to
the stochastic indicator you can see
that yes it has it's already crossed
above 80 before and now it cross back
under 80 so as soon as we get this
breakdown of this trendline we take our
trade and the target as usual is the
next previous low and that's that here
in fact make sure just as few pips above
the next previous low just to make sure
that you're not too greedy and this is
our profit area and our target in this
in this instance was 87 pips and our
stop loss is just a few pips above our
entry and this is how you would trade it
using trendline breaks okay so that
concludes this lesson if you do have any
comments or any questions we'd love to
hear from you so please put them in the
boxes below otherwise if you have a
done so already please subscribe to our
channel or follow us on Facebook
LinkedIn Twitter or Google+ and we shall
see you for the next lesson