How to use Stochastics in your Trading whether it’s Stocks, Options, Forex, Futures or CFD’s. If you don't quite know the best way to use Stochastics, then you need to read below!

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More on the Bonus Video, The Power of Using 2 Stochastics 

Traders can use stochastics in several ways. It can be daunting for inexperienced traders using a simple method of stochastics as they can find themselves being whipsawed in and out of trades. One of the simplest methods of using stochastics is to treat the %K line as a trigger. If the %K line crosses over the %D line to the upside, it is suggested you have a bullish signal. If however the %K line crosses over the %D line to the downside, it is suggested you have a bearish signal.

This is too simple of course as you can see from the diagram below. A lot of the times stochastics will cross over, only to cross back the next trading day.

A way to solve this problem is to only trade on the signals if they have reached an over bought, or over sold situation, represented by the blue line zones (the top one is at 80 and the bottom at 20). The idea is to wait for stochastics to reach an over sold situation which is below 20, and then trade when either %K crosses over %D to the upside, or %K crosses over 20 to the upside. 

As you can see, the trading opportunities were fewer but more profitable. Out of 5 possible trades, 1 (the first) was significant, 2 ( the last 2) gave decent results, 1 was small and the other a loss. This is not too bad considering we are only using stochastics and no other indicator. 

The other dimension to stochastics is divergence. Have a look at how many times you can see divergence on the chart above. Divergence happens quite often in stochastics, and the quicker the stochastics the more likely you are to see divergence. To overcome this problem, I designed a way of reading stochastics that involves plotting two stochastics on your charts.

I designed the system to be used in the forex market, however I feel it works better on stocks, as the stock markets have a definite close of trading, where as the forex markets only really close for weekends. It is definitely a great tool to add to your toolbox.

 If you'd like to see a free downloadable video explaining how I use the system of two stochastics then fill in the form below.