It is very common to combine two indictors when building automated trading systems. Here you have an example of a trading system with two very popular indicators, Stochastic and Moving Averages.
In a lot of ways these two indictors complement each other. Moving Averages is good tool to trade with when the market is moving strongly in one direction or another, or in other words trends. Stochastic on the other hand can indicate overbought and oversold areas. They are not very useful when those zones become even more overbought and oversold, such as in times of strong trends, but can be accurate indicators when the market is choppy and move from one side to another.
So, here is one of the popular ways to build all of that into a system:
1st – Determine the trend using Moving Averages. You can use any parameter you see fit, but I like to use 100 bars Moving Average. Since I day trade, I use it on hourly date but you can test different time periods if you like. To determine the trend is very simple as all you have to do is look on what side of the Moving Average line is the current price. If it is above it, then the trend is up and vice versa for the down trend.
2nd – Time your entrance based on when Stochastic moves in the opposite direction of established trend and enters its oversold zone of under 20 points or overbought zone of over 80. For Stochastic parameters I like to put in 20 and use it on a 10 minute data intervals.
3rd – My stop loss is put 4 pips below the most recent highs or lows that seem significant, and then I allocate how much I am going to trade so I do not risk more than my maximum allowed loss.
See how the system looks on the charts below. The first chart listed is the hourly data chart with MA line present in order to establish trend, and the second chart underneath shows 10 minute bars for timing entrances. Notice the green arrows point to the bar after the Stochastics had dipped below 20.
This system basically buys into an uptrend on any significant pullbacks, and does just the opposite in the down trend. A lot of variations can be done on this, including using stricter measurement for trade entrances.
I like this method, as well as many other traders do, for two main reasons. First of all, I do not have to buy and sell into market frenzy and risk paying worst price possible. Secondly, most likely if the trend has any strength at all, the price will continue to move in its direction in order to at least test highs and lows of the previous move. That way I can lock in some profit there regardless if the market brakes to new highs or lows and minimize my exposure to a possible loss. Here I am happy with not making a killing because sometimes in Forex market staying alive is all I can ask for.
You Might Want To Check These Out:
- Are Moving Averages Useless?
- My Daily Chart Setup I
- Market Update – Trend Confirmations
- Technical Indicators
- How I Use RSI (Relative Strength Index)
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