The Stochastic High-Low is one of the simplest strategies beginners can employ with great success. In this article, we’ll explain how this strategy works and how you can profit from it.
What is the Stochastic Indicator Trading Strategy?
As a measure of momentum, the Stochastic Indicator compares the closing price of a currency pair to the range of its price movement over a specified period of time. Like all other forex indicators, no calculation on your part is needed. You can simply select the Stochastic Indicator from the range of indicators available on MT4 or another forex trading platform.
When reading the Stochastic Indicator, traders look for overbought or oversold conditions. These levels are very easy to locate. The Stochastic Indicator moves between 0 to 100; typically, readings below 20 imply that the forex pair is oversold. If the indicator is above 80, it means the forex pair is likely overbought or at the top of its high-low range.
The general principle behind this indicator is that in a market uptrend, prices will settle near the high. Likewise, when the market is in a downtrend, prices will likely close near the low. [1]
Stochastic High-Low
With this information in hand, you are now ready to employ the Stochastic High-Low strategy.
When the Stochastic falls below 20, reaches 10 and then crosses back up through 20, set your order to buy. Hold the trade until the Stochastic line goes in the opposite direction to reach 80.
When the Stochastic has crossed above 80, reaches 90 and then fallen back below 80, it’s time to sell. Hold the trade until the Stochastic line goes in the opposite direction to reach 20.
This simple setup gives you an effective buy/sell signal that can help you time your entry and exit in the market. Best of all, it’s simple to use and easy to evaluate. When used in conjunction with other signals, you can avoid entering a forex pair on a false signal.[2]
