Simple Stochastics Strategy Using Order Flow Trader

Learning to properly time your trades is a key step in becoming a profitable trader. Get in too soon and you risk taking unnecessary losses on a trade that you could you could have avoided with a little patience. However get in too late, and you risk suffering from poor positioning, meaning you may have missed a lot of the move and indeed end up needing to use wider stops than necessary, had you been properly positioned.

One of the best tools for use in timing your entries to trades is the stochastic Oscillator.

Stochastics is a momentum indicator comparing closing prices to the price range over a specified period. As with all momentum indicators, there are a number of ways this tool can be used but we’re going to focus on one very simple method here that can instantly be applied to improve your trading.

 

 

On the chart above we can see the Stochastics indicator in the bottom panel of the price chart and the basic premise of this method is that when the Green line which is the D Line ( a % moving average of the K Line shown in yellow) is touching the green horizontal line at 80 -price is overbought and we are looking for a selling opportunity. When the green line touches the purple horizontal line at 20, price is oversold and we are looking for buying opportunities.

 

 

You can see that these high and low points on the Stochastics indicator sync up rather nicely with peaks and troughs in price – for the majority of the time. There are some occasions when we don’t see the anticipated reaction. We can also note that price doesn’t simply reverse as soon as the indicator flags oversold or overbought, but the reversals do occur shortly after if not immediately.

So how then do we best use this information to trade?

If we think of the stochastic tool as giving us the area we are looking at for reversals we then need a tool to provide a “trigger” for taking a trade and a fantastic tool for this is Order Flow Trader.

 

 

Looking at the chart above we can see that where we get those overbought/oversold readings on the stochastics indicator we get some great confluent OFT signals allowing us to trade the anticipated reversal with an exact entry point which which we can also base our stop placement.

We can manage our risk using some of the key tips for OFT signals such as placing stops behind the previous swing low (for buy signals) and previous swing high (for sell signals) and waiting for price to break the high of the signal bar (for buy signals) and the low of the signal bar (for sell signals) which also helps to filter out some of the losing trades that can occur where price continues even while the Stochastics are overbought/oversold.

Looking to combine Order Flow Trader with Stochastics indicator is a fantastic way to identify great trading opportunities and is definitely worth trying. One of the really great things about this method is that waiting for the stochastic to move into overbought/oversold territory before taking OFT signals really helps to avoid most of the choppy & weaker signals that we can see in tight range-bound conditions as the stochastic doesn’t move to those extreme levels.

 

In the chart above we can see that whilst price was caught in a very choppy range where we saw lots of OFT signals, the Stochastics indicator didn’t actually register overbought/oversold at any point so we were able to avoid these signals.