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A lesson on trading with the stochastic indicator on the GBP/JPY by:  James ‘Big Dog’ Boyd.

The stochastic is a great tool to monitor the trade to see how much room we have left to go up or down. The stochastic again tells us the bullish or bearish sentiment in the trade. In this example we look at both bearish and bullish examples on the GBP/JPY.

GBP/JPY Chart #1

Caption #1: 1- GBP/JPY short at a diagonal level of resistance on April 6th. 2 – MACD confirms rollover, stochastics crosses to the downside. 3 – GBP/JPY pair selling off at resistance.  Indicator Settings: MACD Hist setting = 6,13,9 and Slow Stochastics setting = 5,3.

GBP/JPY Chart #2

Caption #2: GBP/JPY confirms a stochastic “pinch” after 5 days (April 13th).  Once the stochastic pinches we have 2 options… 1) Exit the trade.  2) Make sure the stop is appropriate.

When the stochastic is oversold, buyers in this case buy the GBP/JPY.

 ***KEY*** Watch the width between the 2 lines of the stochastic. When the GBP/JPY falls, monitor the trade by looking at the separation between the stochastics (you may have not hit your stop loss at this point). If the 2 lines are still apart they have potentially some room to drop. If they pinch, BULLS are buying the GBP/JPY back. If that’s the case, invoke # 2.

GBP/JPY Chart #3

Caption #3: GBP/JPY confirms that it is going to hold the higher low. Stochastic crosses back up representing that bulls are coming back into the trade.

If the stochastic cross back down, you have a greater chance in getting stopped out.

REMEMBER, when the stochastic pinches like in photo #2, we have 2 options — 1) Exit the trade 2) Make sure the stop is appropriate.

 

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fishjumpsmaller.jpg     I thought I’d put this on here as it’s happening for everyone to learn from it. Right now the EUR/USD pennant is popping, breaking above mini-resistance (green oval in chart below). Note that we’d like to wait until the end of the day to take a buy signal. If then end of the day comes, and the bar has peeled way back from its high, the strength of this pop really diminishes.

    This is definitely a break out of the pennant – which is not as significant as the break of a triangle. Is that a buy signal? Usually not, no more than any other support/resistance break usually is. They are the places where you want to find your buy signals. Use your favorite system (i.e. “Workshop Study Set” in Studies) and if you have a buy signal, it has much better odds by being in the context of this pennant-pop.

    Other things which could increase your bullishness/inclination to take the signal would be:

– your posture (for example, “I’m a die-hard euro-bull man!”),

– looking at other events happening (U.S. stocks at support, break lower = bad for the euro), or

– the size of the pennant – had it been bigger it would have been stronger.

    Our goal is to get good at trading the same method over and over. Repetition is key, so stick with certain studies bundled in a system. That said, you’re also an observer, so observe how trades go with a simple “naked” signal, and in the context of situations like this pennant popping.

eurusd1.jpg

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