Stochastic Breakouts aims at identifying trend reversals where it will enter or exit a trade.
This is a longer-term strategy, which executes around 2-3 trades per week on average. This strategy does not open multiple positions in the same direction.
Stochastic Oscillator is a momentum indicator, ranging from 0 to 100, which shows where the closing price of the current bar is in relation to the highs and lows over the given period.
The indicator consists of two lines: main line (%K) and signal line (%D), which is the moving average of the main line. The signal line is also known as the trigger line.
The most common use of the Stochastic Oscillator is to identify oversold and overbought levels, however this strategy is focusing on the crossovers of the two lines, which may indicate new trends: crossing of the main line by the trigger line from below is a bullish signal and the reverse is a bearish signal.
The MetaTrader 4’s default setting for the main line and trigger line are 5 and 3 periods, respectively. This strategy is using setting of 5 and 13 periods in order to limit the number of false signals.
The strategy is meant to open new positions when the price of the instrument has begun to trend and the momentum of the trend can be expected to intensify. The strategy is using 1-hour bars.
In the long term, the ratio of winning to losing trades is expected to be around 1:1, however thanks to the take-profit and stop-loss settings, the profits from the winning trades will often exceed the losses.
- The strategy is comparing the values of the main line and the trigger lines.
- The buy signals will be generated if the main line is above the trigger line by more than 2.6
- The sell signals will be generated if the main line is below the trigger line by more than 2.6
- The positions will be closed when it reaches either a take-profit, or a stop-loss level. This strategy does not reverse open positions.
The strategy is most likely to be successful when the market is in a strong trend in either direction. During the sideways market the strategy is likely to be less successful.