RSI and Stochastic strategy's explanation


Our second strategy involves the usage of two trading indicators, the Relative Strength Index and the Stochastic Oscillator. These two indicators are mostly used to get signals for overbought and oversold market conditions. Thus, their main purpose will be to trade price reversals. This is a scalp day trading strategy suitable for all trading assets.
Our goal here will be to scalp the market for minimal price moves and to rely on a bigger number of trades. This is a very active trading strategy, which involves multitasking and good reactions to open and close trades in the right moment. The two indicators will take place below your chart. They will have separate areas down there.

Strategy rules:

We will open a trade when we get an overbought/oversold signals from both indicators. If both indicators go in the lower part of its areas, we get a double oversold signal. We will expect a price increase, which we will tackle with a long trade. If both indicators go in the upper part of the area, then we have an overbought signal. We need to react with a short trade in this case. The trade will take place until one of the indicators give us an opposite signal supported by a price move against us.

Stop-loss rules:

Trades can be very short in terms of time. Thus, stop-loss orders need to be very tight. It might be better if you decide on a specific stop-loss distance and follow it for every trade – 0.1% for example. Some trading platforms might let you set this stop-loss distance by default with the opening of every single trade.

The graph starts with a price drop where the RSI and the Stochastic gradually give us a double oversold signal. This is an indication that a price increase might occur. We buy the Cable (GBP/USD) and we place a tight stop-loss order at 15 pips’ distance as the trade is not likely to take much time. The price increases and we get an overbought signal from the Stochastic Oscillator.
Few periods afterward, the price action creates a small bearish move. This tells us that the price might be finishing the increase and the overbought signal supports this theory. Therefore, we close the trade and collect our profit.
The trade takes an hour and a half and brings 42 pips’ profit or 0.33%. The risk we take equals to 15 pips, or 0.12%. The win-loss ratio of this trade is 2.8:1. We don’t use a volume indicator here because of an attempt to catch short price moves. These also occur in the absence of a general trend.