Moving Average and Stochastic Combination Trading Strategy
Moving Averages are a math calculation that averages out a series of numeric values. A moving average series can be calculated for any time series. In finance it is most often applied to stock and derivative prices, percentage returns, yields and trading volumes. There are three universal types of moving averages to calculate. The simple moving average is one of the most popular indicators used and is easy to calculate. There is also a weighted and an exponential moving average which are more sensitive to price fluctuations but more complicated to formulate. Stochastic indicator is a popular technical tool used to help determine whether a market is overbought, mean¬ing prices have advanced too far too soon and due for a downside correction, or oversold, meaning prices have declined too far too soon and due for an upside correction. It is based on a mathematical formula that is computed to compare the settlement price of a specific time period to the price range of a specific number of past periods. Required indicators: 1) 100, 200 SMA 2) Stochastic (8,5,5) with horizontal line 80 and 20 SMA and Stochastic Trading Strategy: Buy Signal: When market remains above 100 SMA or 200 SMA, (depend on market behavior) then it will be considered as uptrend. Now you need confirmation from Stochastic for taking entry. When a crossover occurs below 20 level of stochastic, then you need open buy order. When market price is above 100 SMA, or 200 SMA you need to find only buy signal from this strategy. Sell Signal: When market remains below 100 SMA, or 200 SMA then it will be considered as downtrend. When a crossover occurs above 80 level of stochastic, then you need open sell order. When market price is a below 100 SMA, or 200SMA you need to find only sell signal from this strategy. Time frame: H4 or Daily Take profit and Stop loss: Take profit should be 70-100 pips in every signal and you can set take profit 1:2 risk ratio. You can set stop loss below 100 SMA or 200 SMA for buy signal and set stop loss above 100 SMA or 200 SMA for sell signal. If SMA is far away from your entry price, then you can set 50-60 pips stop loss.