Stochastic Trading Strategy

This topic should be called: Combining Stochastics with other Indicators, but Stochastic Gold System sounds real nice.

Stochastic Oscillator indicator can be combined with other trading indicators to form a trading system. For our examples we will combine it with:

• RSI
• MACD
• Moving Averages XAUUSD Trading Indicator

Example 1: Gold Stochastic System

Sell Trading Signal Generated using Stochastic System

From our trading system the sell xauusd trade signal is generated when:

1. Both Moving Averages are moving down
2. RSI is below 50
3. Stochastic moving downward
4. MACD heading downwards below centerline

Sell signal was generated when all these gold trading rules were met. The exit signal is generated when a signal in opposite direction is generated i.e. When the indicators reverse.

Good thing about using such a xauusd system is that we are using different types of indicators to confirm the trade signals and avoid as many gold trading whip-saws as possible in process.

• Stochastic - is a momentum oscillator xauusd technical indicator
• RSI- is a momentum oscillator xauusd technical indicator
• Moving Averages Gold Trading Indicator- is a trend following xauusd technical indicator
• MACD- is a trend following xauusd technical indicator

It is very helpful to combine more than one indicator, as a combination of trading signals is better than relying on just a single indicator. The xauusd technical trading indicator combinations reinforce each other, and cancel out false whipsaw xauusd trade signals.

A gold trend following technical indicator helps a trader to see the overall picture, while using more than one momentum gold technical indicator gives better & more reliable entry and exit points for trading gold.

The indicators combinations & their trading signals help to decipher a lot of the xauusd market activity.

Example 2: Gold Stochastic System

Buy Trading Signal Generated using Gold Stochastic System

For this example the trend is clearly upward, but at some point there were a few gold trading whipsaws generated by the stochastic oscillator indicator, can you identify them? - So the question is how can a trader avoid trading these gold trading whipsaws?

Well, the answer is that by looking at the other technical indicators such as MACD indicator a trader could have avoided the whip saw, even the MACD technical indicator had not given a crossover trading signal although it was very close to the zero center line level, at the same time the gradient at which the moving averages technical indicators turned was not so sharp as to warrant a decisive market trend reversal. Well the thing is that it’s not so obvious when it comes to recognizing market whipsaws: it's a skill that takes some time but after some time you can spot whipsaws from a mile away.

One tip is that as long as MACD indicator is above zero center-line even if the MACD lines are moving downwards then the trend is still upward. As you can see from the above example MACD indicator never went below zero line and afterwards the upward trend continued with the MACD technical indicator maintaining above Zero line & continuing to move upward.

During ranging markets Stochastic Oscillator indicator will give the fastest trading signals which are prone to whipsaws. This is why stochastic indicator is best combined with other indicators & the trading signals traded are confirmed by another one or two other indicators.