This indicator was developed by Welles Wilder around 1978. It quickly became one of the most popular oscillator indicators for traders in financial markets. Swing traders attempt to capture medium-term changes in the trend over a period of a few days. And, the RSI indicator is a great additional tool to help us gauge the constant ebb and flow of the price action. You can use this RSI and stochastic strategy on any chart timeframe or currency pair.
Wait for the Stochastic indicator to hit the 20 level and the %Kline is crossing above the %D line . Please have a look at the chart example below to see how to use the stochastic indicator. Our team at Trading Strategy Guides is developing the most comprehensive library of Forex trading strategies.
In this guide I will look at a simple RSI and stochastic strategy that you can use to analyse currency pair charts and find trading signals. Using RSI values within the Stochastic formula gives traders an idea of whether the current RSI value is overbought or oversold. Moving Average Convergence Divergence is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average from the 12-period EMA. A nine-period EMA of the MACD, called the “signal line,” is then plotted on top of the MACD, and is used to identify buy and sell signals.
So I figured I would start trying convert the built-in Indicator in TOS, not getting consistent alerts when oversold / Overbought are crossed. I stumbled across a minute RSI Stochastic strategy that was posted on Tradingview, I set it up and it appears to give some good entries. I found it easier to understand this Stochastic explanation and I will put into practice when the markets open, to check my understanding. We’ve applied the same Step #1 through Step#4 to help us identify the SELL trade and followed Step #5 to trigger our trade . So, after following the rules of the Best Stochastic Trading Strategy, a buy signal is only triggered once a breakout of the Swing Low Patterns occurs.
Stochastic RSI (StochRSI)
The MACD is a popular trend-following indicator that can help identify the direction and strength of a trend. On the normal Stochastic RSI it may be hard to see the exact crosses between the two lines. Shows green line when K-line crosses up the D-line, but below the 50-level .
The Stochastic indicator works best when using the standard indicator that you can find on both the MT4 and MT5 platforms. Some custom-made Stochastic indicators may cause slowdowns, and may even use different formulas. Before trying any of these trading strategies on the live markets, it is highly recommended that you open a demo trading account in order to practice in a risk-free environment. Investments involve risks and are not suitable for all investors.
Another is noting the moving average line crossovers and their relationship to the center line. Foremost is the watching for divergences or a crossover of the center line of the histogram; the MACD illustrates buy opportunities above zero and sell opportunities below. Generally, if the %K value rises above the %D, then a buy signal is indicated by this crossover, provided the values are under 80. If they are above this value, the security is considered overbought.
The Formulas For the Stochastic RSI (StochRSI) are:
Most traders now consider the StochRSI as an important momentum oscillator that is indispensable. Stochastic RSI is a technical analysis indicator used to support stock market prediction by comparing a security’s price range and closing price. In the chart above of the E-mini S&P 500 Futures contract, the RSI indicator spent most of its time between overbought and oversold , giving no potential buy or sell signals.
RSI stochastic strategy Pros & Cons
This is exactly what the Stochastic is pinpointing – when the price is ready to be sold and/or bought. The Stochastic is a range-bound oscillator, operating between 0 and 100 by default. There are two lines shown on the indicator itself – the slow oscillating %K line and a moving average of %K -which we refer to as %D. Slowing is usually applied to the indicator’s default setting as a period of 3.
We are looking for signals above or below the pivot point. The trick here is to add a 50 level and watch for the bullish and bearish periods. For this setup, I used a 100-period for the RSI and a 100-period for the K percent.
We don’t want to wait for too much either, as this will result in a reduced profit margin. We’re day trading, but having in mind the higher time frame sentiment and trend. After extensive research and backtesting, we’ve found that this indicator is more suitable for day trading.
Once we determined a direction to trade, we need the StochRSI and the MACD to confirm the trade. If you want to make money from scalping, it’s imperative to have a disciplined approach to trading and a solid trading system. We can observe that the StochRSI indicator is more volatile compared with the other 2 oscillators, due to its increased sensitivity. A bear trap denotes a decline that fools market participants into opening short positions ahead of an upside reversal that squeezes those positions into losses. Using only the last 14 RSI values, compute the new StochRSI values as each period ends. Take note of the current RSI, the lowest, and the highest values on the 14th.
The Difference Between the Stochastic RSI and the Relative Strength Index (RSI)
Another strategy is to look for divergences between the MACD, RSI, and Stochastic oscillator and the price of the security. For example, if the price is making new highs but the MACD and Stochastic oscillator are not, this could be a bearish divergence and a potential sell signal. Similarly, if the price is making new lows but the MACD and Stochastic oscillator are not, this could be a bullish divergence and a potential buy signal.
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If the RSI is above 70 or the Stochastic oscillator is above 80, this could be considered an overbought condition and a potential sell signal. If the RSI is below 30 or the Stochastic oscillator is below 20, this could be considered an oversold condition and a potential buy signal. It is important to note that overbought and oversold conditions do not necessarily indicate that a reversal is imminent, but they can be used as a confirmation of a trade signal. Stochastic oscillator is a momentum indicator that compares a security’s closing price to its price range over a given period of time. The indicator, which ranges from 0 to 100, is created by taking the lowest low and the highest high over the specified time period and plotting those values as a single line. The indicator is then plotted alongside the security as a single line, usually below the price chart.
Otherwise, you might end up with a fast-paced RSI that is not that reliable. Without correct settings, even the best trading ideas can end up in disaster. P.S. If the ‘Order’s limit was reached’ message appears, you can use the specific time test function to narrow the test range. Only enter when the K line and the D line cross outside the threshold, and close the position at the next cross. This strategy is based on Stochastic RSI fast and slow line crossing and has the advantage of being adjustable with high degree of freedom.
Trading any financial instrument involves a significant risk of loss. Commodity.com is not liable for any damages arising out of the use of its contents. When evaluating online brokers, always consult the broker’s website.
Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The use of multiple indicators can lead to analysis paralysis, where a trader is overwhelmed with information and finds it difficult to make trading decisions. This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. Our team at Trading Strategy Guides.com has put a great deal of time into developing the best guide to Trading Multiple Time Frames – The Key to Successful Trading.