The Orientation trading strategy is a simple and effective way to employ Exponential Moving Average with the Stochastic oscillator. The logic behind this strategy is to buy or sell the EMA crossover, while the Stochastic filters out false signals.
The exponential moving average (EMA) is widely utilized trading tools. Traders use the EMA overlay on their trading charts to determine entry and exit points of a trade based on where the price action sits on the EMA. Stochastics are popular because it is easy to understand and has a high degree of accuracy. Stochastics are used to show when a stock has moved into an overbought or oversold position.
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Settings for the “Orientation” Trading Strategy
As mentioned before, trading is done with two popular indicators: EMA and Stochastic. First of all, set up a 1-minute chart for the volatile assets. You can choose any currency pairs or crypto.
Next, install two EMAs and Stochastic oscillator on your chart. You can do it in one click in the Pocket Option terminal.
Finally, set the recommended parameters:
- EMA 1: 10 (green);
- EMA 2: 21 (red);
- Stochastic: 14; 3; 3.
You can use other colors to mark the EMAs, the main thing you have to distinguish the 10 EMA from 21 EMA.
Trading Tips for the “Orientation” Trading Strategy
Let’s discuss the “Orientation” Trading Strategy in details. The stochastic oscillator is a popular momentum indicator. It compares the price range over a given time period to the closing price over the period. It is highly sensitive to price movements in the market and perhaps oscillates more frequently up and down than nearly any other momentum indicator.
Stochastic is used to exit from the “over-” zones. Trading is done in the opposite direction from the current movement.
Experienced traders know that the best momentum in the direction of a trend occurs at the moment of entering one of the zones.
- The downtrend intensifies when the Stochastic enters the oversold zone.
- The uptrend intensifies, when the Stochastic enters the overbought zone.
Let’s apply the above rule to trading.
We also need to “weed out” false signals: that’s why we will use the crossovers of EMAs as an additional reference point.
We have to open a deal in the same direction in which the green EMA crosses the red EMA.
Follow the recommended trading algorithm:
- A CALL contract when the Stochastic crosses level 80 from the bottom up, and the green EMA crosses the red EMA moving in the same direction.
- The PUT contract – when the Stochastic lines enters the oversold zone (level 20 from top to bottom) and the EMAs intersect in the same direction.
As mentioned above, trading is carried out on a minute timeframe. The expiration must be set not less than the formation time of three candles.
As a rule of thumb, we buy when the market is oversold, and we sell when the market is overbought. Many forex traders use the Orientation strategy in different ways, but the main purpose is to trade when the market conditions could be possibly overbought or oversold.
A word of caution: Stochastic can remain above 80 or below 20 for long time, so just because the indicator says “overbought” doesn’t mean you should blindly sell. The same thing if you see “oversold”, it doesn’t mean you should automatically start buying!