Although simple to explain this strategy is a little more advanced than the Simple Stochastic Strategy I published earlier. This one uses divergences in the indicator to trade both trend following and non-trend following signals. Trading against the trend is not usually the thing to do but sometimes the trend changes.
Simple Stochastic Divergence Binary Options Strategy
Divergence in stochastic is a remarkably handy indicator of when that is about to happen. The trick is in how you take the signals. Sometimes a divergence is just a divergence and doesn’t lead anywhere, and sometimes they lead to major corrections. You have to have a firm grasp on underlying fundamentals, how near term news is affecting the outlook and what to do when divergence shows up on your charts.
1. 100 period Bollinger band
2. 200 period Bollinger Band
3. 100 period SMA (simple moving average)
4. 200 period SMA (simple moving average)
5. 14/7/3 Slow Stochastic.
Platform time frame: H1
How Does Simple Stochastic Divergence Binary Options Strategy Work
- Basically, it works on divergence. Divergence is when the asset you are studying reaches an equal or new high, or an equal or new low, and that high or low is not matched by a corresponding high or low on the stochastic.
- Divergences can occur in two places while a market is trending; at a peak and at a trough. The peaks, such as a new high, can lead to tests of support and opportunities to trade counter the trend by catching a near term reversal. Divergences that occur in troughs, in the case of an uptrend, are actually confirmations of support levels and in essence a trend following signal.
- Divergence occurs when the price action on the chart is either still going up, and the stochastic is coming down, or vice versa.
When buying, the stochastic should have been initially oversold (below 20). After this, the price action continues lower, whilst the stochastic begins to climb higher. The entry takes place during this process, when a entry signal occurs (reversal candle against support and 200 SMA/Bollingers)
When selling, the stochastic should have been initially overbought (above 80).
After this, the price action continues higher, whilst the stochastic begins to move lower. The entry takes place when a G7 entry signal occurs (reversal candle against resistance and 200 SMA/Bollingers. This type of entry is best described using chart examples, and the following 4 charts illustrate the divergence entry.
This strategy doesn’t suck because it works, and because even if you don’t use it to make trades, you can use it to stay out of trades that may otherwise be a loser. You know, a warning that the trend is weak and that maybe you should wait to see if there is going to be a pull back before making that trade. I’ve often heard that a nod is as good as a wink, especially if it keeps you from losing money. In the end though, I think that anyone who begins to use divergence to stay out of trades will eventually come to realize the profits they are losing on those down swings by not trading. This strategy doesn’t suck because it helps double the potential entry points you get with the Simple Trend Following Strategy.
This strategy might suck because it is more advanced, not easily used by new traders and relies on a certain level of skill. It also might suck because it is trading counter to the longer term trend and tried to catch the near and short term reversals. These reversals are hard to predict in terms of absolute depth and duration, which makes it harder to pick expiry. It’s really hard to know when exactly one will start, and how far it will go, it all depends on current conditions.
The bottom line
Y’all don’t have to use it, but I do. It is a natural extension of the Simple Trend Following Strategy and one that I use everyday, on every chart, as they present themselves. The divergence is like an X-ray into the market telling you where it is strong, and where it isn’t. You can use this knowledge for many things including keeping you out of a trend following trade, and setting you up to catch a reversal and the possible beginning of a new trend. The caveat is on expiry.
Strategy collected from: http://www.forexstrategiesresources.com/