In this article, I’m going to show you how to use the Stochastic RSI Strategy which settings you should be using, and on which time frame so that you can have a clear understanding of a better entry and when the price is actually going to reverse or continue.
There is the stochastic RSI and it basically is this formula that I’m going to show you in the article but let me explain it this way when the standard RSI is doing its flow it's only got peaks.
You don't know when that price is actually going to start coming down whereas with the Stochastic RSI it is two overlying percentage averages and so when those lines cross a lot of people use that as their indication to get in on their position.
Let's jump into the charts I’m going to show you how to set it up and I’m going to talk about the basics of the stochastic RSI formula so Investopedia is one of the greatest websites if you want to learn about an indicator or how it works or how to adjust the settings to get the best results but essentially for the stochastic RSI Strategy.
It's taking the rsi minus the minimum rsi that it was in that time frame divided by the maximum rsi minus the minimum rsi so you can see how it's taking multiple averages working it in to make one specific indicator there is also another part of the stochastic rsi which you'll see when we go into the settings.
But there's a k period percentage and a D period percentage the K period is the number of periods used in the stochastic calculation whereas the D percentage is the number of periods used.
And when calculating the moving average just so that you have a basic understanding that this takes into account a lot of averages & percentages. Now we are looking at EUR/USD the most commonly traded Forex currency pair on earth.
I want you to pull up two things on your chart two things alone both free indicators that you can use in confluence with each other to find a great entry on a trade. The first thing you're going to have is a 200 moving average you can use smooth You can use exponential it depends on which currency pair I prefer smooth.
The next indicator that you're going to pull up is the stochastic RSI it is a built-in indicator put a star next to it keep it on your favorites list. Now once you add that you're going to get this big purple line with these two overlapping red and blue lines.
Now I want to discuss these settings really quickly and I want to tell you how you can adjust them depending on which time frame you are trading so clicking on the settings you can see the K percentage is three D percentage is three RSI length is 14 which is the standard number for the traditional relative strength index and the stochastic length is 14.
These settings for Stochastic RSI Strategy are completely fine if you are trading 15 minutes and above so the 15 the 30 the one hour the four hours or the daily if however, you are trading below the 15 minute time frame you want to change the stochastic length to eight as you can see it made it a lot more noise but that's because we're still on the 15-minute chart if
we take it down to the five minutes it smooth’s it out just a little bit but we are going to keep the default settings and keep your trading on a higher time frame which means less false signals keeping you more consistent.
Basically what we're doing here is we're looking for continuations of a downtrend or an uptrend depending on if it's above or below the 200 moving average.
Essentially we're looking at places like this finding resistance on that 200 continuing down finding resistance on the 200 again and continuing down but we're using the stochastic RSI to find our entry points all right zooming this in a little bit closer.
You can see that we're getting a lot of resistance off that 200 and it starts coming down so people would see this normally and start getting in right about here just simply looking at the price action.
But if you had the stochastic RSI up you would actually see a crossover in the RSI so making a vertical line right here let's zoom it in and look at what the price action is doing versus what the stochastic RSI is doing.
you can see we had this last-ditch effort momentum swing up and then completely flat top starting the continuation down this in itself is a very weak signal.
But if we look at the stochastic RSI Strategy we see that at this point we had a stochastic crossover. We wait to make sure that that's solid. Signal this right here is three candles into the downside of the move.
So you can clearly see that this price is in the overbought territory of the stochastic RSI with the potential to continue to the downside and that's exactly what you got going on here and with the stochastic RSI maintaining this oversold market for quite some time. This is just a heavy momentum grab you could have gotten out on this first stochastic cross but I mean theoretically you could have just maintained a trailing stop loss on this and gotten a nice decent move out of it again using the stochastic RSI Strategy alone would be very difficult in my opinion you need to overlay this with multiple indicators.
NOTE: This article is not investment advice for anyone because online trading could be a high risk for all who have a lack knowledge & experience. 86% of traders lose money in financial markets. we are not your financial advisors who guarantee your profit at all.