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.
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.
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.
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.