Top 5 Stochastic Trading Strategies for Olymp Trade.

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What is Stochastic?

Did you just begin your journey in trading, tried to flip open that trading platform, found the stochastic indicator, and are wondering what sort of thing Stochastic is?

Stochastic is an oscillator or other, chart analysis tool that traders use to measure price momentum and spot potential price reversal points.

Components of Stochastic.

The stochastic oscillator settings consist of four lines:

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  • Fast line.
  • Slow line.
  • The upper limit (80).
  • Lower limit (20).

The fast line and the slow line oscillate on the Stochastic scale which runs from 0 to 100, sometimes crossing over each other.

Basic Signals Provided by Stochastic.

Considering that the stochastic oscillator is majorly used by traders as a measure of price momentum and direction of momentum; you can set yours to show waxing price momentum upwards or downwards as well as show waning price momentum in either direction.

Waxing momentum means that momentum is increasing while waning momentum means decreasing momentum.

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Basically, stochastic shows waxing price momentum upwards when the fast line crosses over from below to above the slow line.

On the other hand, the oscillator shows waxing price momentum downwards when the fast line crosses over from above to below the slow line.

The stochastic oscillator shows waning price momentum by means of overbought and oversold conditions because it is a bound oscillator.

If the price had an increase in upward momentum but now both stochastic lines read above the upper limit of 80, then such is an overbought condition.

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stochastic shows an increase in upward momentum

Waning price momentum meaning a possible downward reversal will be confirmed when the fast line crosses over from above to below the slow line while still above the upper limit.

On the flip side, if the price had an increase in downward momentum but now both stochastic lines read below the lower limit of 20, then such is an oversold condition.

Waning price momentum meaning a possible upward reversal will be confirmed when the fast line crosses over from below to above the slow line while still below the lower limit.

Such is how the stochastic can be used to generate basic signals based on the direction of price momentum and the possible direction of the reversal. 

Stochastic shows oversold condition

Stochastic Trading Strategies.

The Stochastic oscillator can be used together with other technical tools to formulate highly profitable trading strategies in Olymp Trade.

Olymp Trade provides almost every other tool you need to perfectly blend with stochastic for the best outcome.

Stochastic is a major technical oscillator and that is why it is core to the trading journey of almost every trader.

For that reason, we’ve compiled the top 5 stochastic trading strategies which you can apply in your Olymp Trade trading to make more profits.

Without any further ado, here’s my list of the best stochastic strategies ever formulated. 

  • Stochastic Divergence Trading Strategy.
  • Stochastic-MACD Trading Strategy.
  • Stochastic-RSI-EMA Trading Strategy.
  • Stochastic-Price Action Trading Strategy.
  • Stochastic-Channel Trading Strategy.
  1. Stochastic Divergence Trading Strategy.

Stochastic divergence occurs when the stochastic oscillator does not directly reflect what is happening on the price.

Meaning, that divergence happens when the price is making lower lows while the stochastic oscillator is making higher lows.

Similarly, where the price is making higher highs, the stochastic oscillator is making lower highs.

Trading the Stochastic Divergence Trading.

Step 1 – Get Trading Signal for The Stochastic Trading Strategies.

The first step involves looking for a trading signal.

There are two types of stochastic divergences i.e bullish and bearish.

  • Bullish stochastic divergence – in a bullish stochastic divergence, prices make lower lows as the stochastic oscillator makes higher lows. Meaning that the price is in a downtrend but the fact that the stochastic oscillator is making higher lows means that the downward momentum is slowing and chances are that an upward trend reversal is coming up.

Bullish stochastic divergence

  • Bearish stochastic divergence – in a bearish stochastic divergence, prices make higher highs as the stochastic oscillator makes lower highs.

Meaning, that the price is in an uptrend but the fact that the stochastic oscillator is making lower highs means that the upward momentum is slowing and chances are that a downward trend reversal is looming.

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Bearish stochastic divergence

Step 2 – Confirm Entry for this Stochastic Trading Strategies.

A stochastic divergence only means a slowing of price momentum either upwards or downwards.

As such, it may not necessarily translate into a trend reversal.

That is why you need to confirm the bullish or bearish divergence signal you get from step 1. Here is how to confirm:

  • Bullish divergence signal confirmation – the price is making lower lows as the stochastic oscillator makes higher lows.

Draw a trend line joining the lows of the price which must be sloping downwards.

Identify the corresponding highs of the section on which you have drawn the trend line joining the lows and draw another trend line joining those highs, which must also be sloping downwards.

For confirmation that the bullish divergence will cause an upward reversal, the price must break the trend line joining the highs upwards.

stochastic oscillator makes higher lows.

  • Bearish signal confirmation – the price is making higher highs as the stochastic oscillator makes lower highs.

Draw a trend line joining the highs of the price which must be sloping upwards.

Identify the corresponding lows of the section on which you have drawn the trend line joining the highs and draw another trend line joining those lows, which must also be sloping upwards.

For confirmation that the bearish divergence will cause a downward reversal, the price must break the trend line joining the lows downwards.

Bearish signal confirmation on stochastic

Step 3 – Entry.

Enter a buy position following a confirmed bullish stochastic divergence signal.

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On the flip side, enter a sell position following a confirmed bearish stochastic divergence signal.

Step 4 – Exit.

Hold a buy position until the stochastic oscillator dips below a reading of 50 from above.

Also, hold a sell position until the stochastic oscillator rises above a reading of 50 from below.

  1. Stochastic-MACD Trading Strategy.

You already know what a stochastic oscillator is, right?

It is all we are talking about here and much about it is in the introduction.

But what about this MACD which is now part of this second strategy?

MACD stands for Moving Average Convergence Divergence.

Thing is, the stochastic-MACD trading strategy is a trading technique blending two technical oscillators which are the stochastic oscillator and MACD. Back to MACD now.

Moving Average Convergence Divergence (MACD).

MACD is a trading tool which traders use to identify both the direction and the strength of a market trend.

MACD is composed of a zero line, fast-moving average, slow-moving average, and a histogram or curve.

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Usually, when the market is trending upwards, the MACD moving averages and the histogram or curve shift from below to above the zero line.

The fast-moving average may also cross over from below to above the slow one.

However, when the market begins to trend downwards, the MACD moving averages and the histogram or curve shift from above to below the zero line.

The fast-moving average may also cross over from above to below the slow one.

The Stochastic-MACD Strategy.

Now that you know what stochastic is and what MACD is, the next thing is knowing how to blend them into a strategy.

It is all we are going to do in this section.

In this strategy, MACD is the primary tool. It is the technical tool used to generate signals which are then confirmed using the stochastic oscillator.

Step 1 – Get signals Signal With this Stochastic Trading Strategy

A basic MACD bullish signal will be shown by either:

  • The fast MACD Moving Average crossing over from below to above the slow MACD Moving Average.
  • The MACD Histogram/curve or both MACD Moving Averages shift from below to above the zero line.

A basic MACD bearish signal will be shown by either:

  • The fast MACD Moving Average crossing over from above to below the slow MACD Moving Average.
  • The MACD Histogram/curve or both MACD Moving Averages shifting from above to below the zero line.

The Stochastic-MACD Strategy.

Step 2 – Confirm signals from this stochastic strategy.

This step involves using the stochastic oscillator to confirm the signal obtained in step 1.

Here is how you confirm the respective signals:

  • Bullish MACD signal confirmation – the stochastic fast line must have crossed the oversold level (20) downwards then crossed the same level from below upwards.

It is even a stronger bullish signal if the fast stochastic line crosses over from below to above the slow line at the oversold level.

Bullish MACD signal confirmation

  • Bearish MACD signal confirmation – the stochastic fast line must have crossed the overbought level (80) upwards then crossed the same level from above downwards.

It is even a stronger bearish signal if the fast stochastic line crosses over from above to below the slow line at the overbought level.

Step 3 – Entry.

Enter a buy position following a confirmed bullish signal and a sell position following a confirmed bearish signal.

Step 4 – Exit.

Hold a buy position until the stochastic oscillator dips below a reading of 50 from above.

Also, hold a sell position until the stochastic oscillator rises above a reading of 50 from below.

  1. Stochastic-RSI-EMA Trading Strategy.

This strategy combines the stochastic oscillator with the RSI and the EMA.

But what really is this RSI thing?

RSI stands for Relative Strength Index. But you ask, ‘what is the Relative Strength Index’? I am about to answer you right away.

Relative Strength Index (RSI).

The Relative Strength Index is a technical analysis tool that traders use to measure price momentum as well as to show price reversal points.

It is composed of a line oscillating about the 50 level (acting as a zero line) and within the 70 and 30 levels as the upper and lower limits respectively.

Usually, when the RSI line crosses from below to above the 50 mid-level, it points towards an upward price momentum.

However, when the RSI line crosses from above to below the 50 mid-level, price momentum is downwards.

Apart from measuring price momentum, we also mentioned that the RSI is used to pinpoint price reversal points. It does so by showing overbought and oversold conditions.

An overbought condition is where the RSI line reads above 70, hinting at an exhausted market that is about to reverse downwards.

Oversold assets in RSI

On the flip side, an oversold condition occurs when the RSI line reads below 30, hinting at exhausted sellers which are about to be overpowered by buyers as the price reverses upwards.

RSI in Olymp Trade

You already know how the stochastic works and I have just fed you on how the RSI works.

What else is required for you as far as this strategy is concerned?

You need to incorporate a long-term moving average such as a 200-period Exponential Moving Average.

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Exponential Moving Average (EMA).

The Exponential Moving Average is a technical indicator that calculates and shows the average of a given range of prices of an asset over a specified number of periods.

In this case, the EMA used is applied to 200 periods.

EMA is different from other moving averages because it places a greater significance on the most recent data in its calculation, making it a more preferable moving average.

EMA presents in the form of a continuous line on the main chart.

EMA - Exponential Moving Average

The calculations are presented in the form of a line connecting the results of the calculations in a smoothed continuous line.

When the EMA is sloping upwards and the price is trading above it, then the market is on an uptrend.

However, when the EMA is sloping downwards and the price is trading below it, then the market is on a downtrend.

The Strategy.

So you now understand how the three technical tools mentioned in this strategy work, right?

Now what’s left is how to formulate a strategy incorporating the three.

The primary indicator in this strategy is the 200-period EMA.

EMA 200 is used to generate trading signals which are confirmed using the RSI and the stochastic oscillators.

Step 1 – Signal from the stochastic trading strategy.

Here is what EMA bullish and bearish signals look like:

  • Bullish EMA signal – EMA 200 is sloping upwards and the price has crossed to trade above the EMA.
  • Bearish EMA signal – EMA 200 is sloping downwards and the price has crossed to trade below the EMA.

Step 2 – Confirm signals from the stochastic trading strategy.

You must confirm your bullish or bearish signals lest you fall for fake-outs and lose significantly. But how do you confirm your signals? Here is how:

  • Bullish EMA signal confirmation – the RSI must be reading below 30 (oversold condition) and the fast stochastic line should cross over from below to above the slow stochastic line at the oversold level (20).

Stochastic-RSI-EMA Trading Strategy.

  • Bearish EMA signal confirmation – the RSI must be reading above 70 (overbought condition) and the fast stochastic line should cross over from above to below the slow stochastic line at the overbought level (80).

Step 3 – Entry.

Enter a buy position on the next bar’s open after a confirmed bullish EMA signal. On the contrary, enter a sell position on the next bar’s open after a confirmed bearish EMA signal.

Step 4 – Exit.

Hold a buy position until the stochastic oscillator dips below a reading of 50 from above. Also, hold a sell position until the stochastic oscillator rises above a reading of 50 from below.

  1. Stochastic-Price Action Trading Strategy.

This strategy involves a combination of the stochastic oscillator with price action to make trading decisions.

Already conversant with a stochastic oscillator, right? No question about this, right?

But what is this price action we are talking about really?

Price Action.

Price action is basically how the price behaves.

If a trader uses price action to trade, they simply observe the highs and lows of the price and obey what the price is saying about itself without the influence of any indicator, oscillator, or technical tool.

Price action may be in many forms such as support levels, resistance levels, trend breakouts, and many more concepts.

The concepts we shall propagate in this strategy are support and resistance as far as price action in this context is concerned.

Support? Resistance? What sort of stuff are these?

Support and Resistance.

Support is a market price level that indicates a strong buy pressure.

It hints at a surplus of buyers and so falling prices, almost always, seem to reverse upwards once they reach such price level or zone.

Resistance, on the other hand, is a market price level that indicates strong selling pressure.

It points to a surplus of sellers and so rising prices, almost always, seem to reverse downwards once they reach such price level or zone.

Support and resistance in Olymp

The Strategy.

You now understand the stochastic and price action, especially support and resistance, right?

How they should blend together to result in a trading strategy is what still remains vague, right?

Well, we are going to leave no stone unturned as we explain everything bit by bit.

The primary concept here is support and resistance.

The signal obtained from support or resistance will then be confirmed using the stochastic oscillator.

Step 1 – Signal.

Here is how to obtain bullish and bearish signal using support or resistance:

  • Bullish signal – establish a zone of strong buy pressure, where falling prices, almost always, seem to reverse upwards once they reach that zone.

That will be the support zone and a bullish signal.

Note that the support may have either a horizontal or diagonal layout.

Bull trap pattern in Olymp Trade

 

  • Bearish signal – establish a zone of strong sell pressure, where rising prices, almost always, seem to reverse downwards once they reach that zone.

That will be the resistance zone and a bearish signal. Note also that the resistance may have either a horizontal or a diagonal layout.

Step 2 – Confirmation.

You need to subject your bullish or bearish signal to confirmation with the stochastic oscillator.

Here is how to go about it:

  • Bullish support signal confirmation – the fast stochastic line should cross over from below to above the slow line at the oversold level (below 20).
  • Bearish resistance signal confirmation – the fast stochastic line should cross over from above to below the slow line at the overbought level (above 80).

Step 3 – Entry.

Enter a buy position following a confirmed bullish signal at a support zone and a sell position following a confirmed bearish signal at a resistance zone.

Stochastic-Price Action Trading Strategy.

Step 4 – Exit.

Hold a buy position until the stochastic oscillator dips below a reading of 50 from above. Also, hold a sell position until the stochastic oscillator rises above a reading of 50 from below.

  1. Stochastic-Channel Trading Strategy.

This strategy involves the combination of the stochastic oscillator with a drawn price channel to make trading decisions.

To this end, you must already know everything about stochastics. If anything, I only need to take you through the price channel part.

Price Channel.

A price channel is any price range, whether horizontal or diagonal, which the price seems to obey such that it trades within a confined channel.

Drawing a trend line connecting the highs of the price and another one connecting the lows of the same price at the same section produces a price channel.

A price channel occurs where the highs of the price at a particular section seem to form an almost parallel line to the corresponding lows of the price at that particular section of the chart.

When a trend line joins the highs as another joins the lows of the price, the result is an almost regular tunnel or channel.

A price channel sloping upwards hints at an uptrend while a trend line sloping downwards hints at a downtrend.

Stochastic-Channel Trading Strategy.

The Strategy.

Having an understanding of the basics of channel trading and enough knowledge of the stochastic oscillator is enough to catapult you to the next phase of this discussion.

The primary concept is channel drawing because price channels are used to generate trading signals which can then be confirmed using the stochastic oscillator.

This is actually a trend continuation trading strategy. I

t takes advantage of an ongoing trend to pick perfect entries using the stochastic oscillator.

Step 1 – Get signals from this stochastic trading strategy.

Observe and spot a price section that is likely to form a uniform tunnel or channel if a trend line is drawn joining the highs and another joining the lows of that price section.

If you do, join the highs of the price with a trend line.

Do the same for the lows of the price with another trend line to obtain a price channel bound by two trend lines below and above.

The channel may be perfectly horizontal or even diagonal.

Here is how you derive the bullish and bearish signals:

  • Bullish signal 1 – the price channel is sloping upwards, meaning that the price is on an uptrend. The price is at the lower limit of the price channel, or the trend line joining the lows of the price.
  • Bullish signal 2 – the price channel is horizontal, meaning that the market is ranging. The price is at the lower limit of the channel which is the trend line joining the lows of the price.
  • Bearish signal 1 – the price channel is sloping downwards, meaning that the price is on a downtrend. The price is at the upper limit of the price channel, or the trend line joining the highs of the price.
  • Bearish signal 2 – the price channel is horizontal, meaning that the market is ranging. The price is at the upper limit of the channel which is the trend line joining the highs of the price.

Step 2 – Confirm signals from this stochastic trading strategy

You want to be sure that the price will not break the trend line you have just drawn.

To be sure, you must subject your signal to a test or confirmation before entry. Here is how to go about the confirmation:

  • Bullish signal confirmation – the fast stochastic line should cross over from below to above the slow line at the oversold level (below 20).
  • Bearish signal confirmation – the fast stochastic line should cross over from above to below the slow line at the overbought level (above 80).

Stochastic-Channel Trading Strategy.

Step 3 – Entry.

Enter a buy position following a confirmed bullish signal and a sell position following a confirmed bearish signal.

Step 4 – Exit.

Hold a buy position until the stochastic oscillator dips below a reading of 50 from above. Also, hold a sell position until the stochastic oscillator rises above a reading of 50 from below.

Conclusion – Stochastic Trading Strategies to try in 2022.

The stochastic oscillator is among the basic technical trading tools in Olymp Trade.

Almost every trader has used the oscillator at some point in their trading journey explaining why it is so popular.

With the above trading strategies do you still not have a reason to continue winning?

Happy Trading!

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