Saturday, June 7, 2008

Learning To Love Stochastics

Many of you trading in the Forex markets know that the difference between success and failure lies in the probabilities.

What is the probability that your speculation will be correct?

The more often that your positions are correct the more profitable you will be. This is part of the reason that so many bozos are busy promoting supposedly infallible commercial signals. Seriously, if their signals were infallible, why wouldn't they get rich trading on them instead of selling them to you for peanuts?

Something I've noticed recently is that stochastic indicators show a good correlation with spikes in price. Of course, this does not imply a one to one correlation, but if you are betting with the stochastic indicators you will simply find yourself on the correct side of a nice price move from time to time.

As I've said before, I'm also a fan of Bollinger bands... and they can certainly be used together.

Here's a simple strategy you can try. Pick a carry trade, such as AUDJPY, and consider buying it when the price touches the bottom Bollinger band. At the same time, ensure that the stochastic indicator is either at the bottom or just starting to come back towards the top.

The idea is to open a small position that you can afford to hold and carry, but to accept a profit if your position proves to be profitable. Remember, prices don't go in one direction forever, so don't be afraid to cash out your position -- without beating yourself up if you don't catch the top. It's about consistently making profitable trades not being the best at calling tops and bottoms!

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