Using 200 EMA and stochastic indicator for forex trading
The 200 exponential moving average (EMA) and the stochastic indicator is used by foreign exchange (Forex) traders for their scalping strategy. If the price is below the 200 ema, the trend for forex is down and if it is above 200 ema, it is considered an upward trend. The stochastic indicator is used to determine oversold or overbought market conditions. For this indicator, when the stochastic levels are exceeding 80, too many traders have invested, and prices are likely to decrease. If the stochastic indicator decreases below 20, the forex market is oversold and prices are likely to increase in the future.
200 EMA and stochastic indicator trading strategy is a trend trading strategy where orders are generated after a pullback. While 200 EMA moving average represents an indicator that shows the main trend for following, the stochastic indicator determines the moment to enter into a trade. BUY order will be generated if the main trend is uptrend moving above the 200 EMA value, while the stochastic indicator is below 20. SELL order will be generated if the main trend is downtrend moving below the 200 EMA value, while the stochastic indicator is above 80.
Trading parameters
This scalping strategy can be used for any currency pairs. The time frames can vary and should be preferably more than 5 minutes. The 200 ema and stochastic are the main Forex indicators used. Users of the MT4 forex trading platform will find that the stochastic indicators are the default setting.
Prepare:
1. EMA 200 indicator on the chart
2. Stochastic indicator (oscillators)
3. Download Fibo expansion Indicator Mt4
BUY rules:
BUY if the price is above 200EMA AND stochastic indicator is below 20.
The trend is bullish.
Stop loss and target are defined buy Fib. levels using the auto Fib indicator.
The trader should buy only if the Forex prices are in an uptrend moving above the 200 ema value, while the stochastic indicator should have declined below twenty, and are now increasing in value. If these conditions are met, the trader can place a buy order, when the candlestick closes.
SELL rules:
SELL if the price is below 200EMA AND stochastic indicator is above 80.
The trend is bearish.
Stop loss and target are defined buy Fib. levels using the auto Fib indicator.
The trader should sell after he notices a downtrend in the market, with prices below the 200 ema indicator level. He should also confirm that the stochastic indicator value to check whether it has exceeded 80 and is now reducing. If both these conditions are satisfied, the trader should immediately place his order for selling when the candlestick closes.
BUY trade example:
On 5 minute chart, price is above EMA200 and stochastic is below 20. Stop loss is 50 Fib. level and targets are 76.4% and 100% Fib. levels.
Disadvantages of the stochastic, 200 ema indicator, scalping strategy
This strategy is not effective when there are no trends, market moves sideways since a large number of false signals are generated. The stochastic indicator oscillates between extreme values. Traders will find that they are facing the problem that the trend is very strong, yet the stochastic indicator is giving an inaccurate signal.
Advantages
The 200 Ema indicator helps detect the trend and the stochastic indicator is useful for measuring how strong the trend is. Since two indicators are used, it is safer to purchase or sell Forex. For additional checking before placing forex trading orders, candlesticks for forex reversal can be used to confirm the right point to enter a forex trade.
