The Stochastic Oscillator method
The Stochastic Oscillator method uses the stochastic indicator, which is available on
MT4 for
forex trading. The stochastic indicator is a very short-term momentum indicator calculated by the closing price of a prior period.
The indicator has two lines — the faster, more responsive %K line and the slightly slower, less responsive %D line. It is the relationship between these two lines that the scalper focuses on, as each line calculates the moment of the underlying market over slightly different time frames.
As an oscillator, its readings will always be between 0 and 100. This indicator is frequently used as an “oversold” (below 30) and “overbought” indicator (above 70). However, that is not the way a scalper will use the oscillator.
A scalper holds onto the position until the lines cross the other way and hold flat, awaiting a new signal. The scalper will buy long when the fast line crosses above the slow line and hold that position until the fast line crosses below the slow line. A short position is initiated when the fast line crosses below the slower line and is closed when the fast line crosses back above the fast line.
Moving averages
Some scalpers rely on
moving averages, which measure the momentum of trends in the market. The trader will use two or three moving averages. For example, they will rely on a short-term one, which measures the average movement over five periods. They will also put a 10-period or 20-period moving average on the chart.
When the short-term moving average line crosses over the longer-term one, it is a bullish signal. Scalpers will enter the market seeking quick profits. When the longer-term average crosses below the short-term line, you might consider opening a short position to profit from a downward market move.
You can use simple moving averages (SMAs) or exponential moving averages (EMAs), which are weighted to give more value to recent price movements. EMAs are more sensitive, so many scalpers prefer them because they allow them to enter the market slightly earlier.
Relative strength index (RSI)
The Relative Strength Index (RSI) is another indicator that measures supply and demand in the market. Like the Stochastic Oscillator, it has a 0-100 scale. Some traders think the RSI is slightly easier to read because its lines are smoother than the Stochastic Oscillator. The market is overbought when the RSI line rises above 70 and oversold when it drops below 30.
Like the stochastic strategy, you’ll want to exit the trade as soon as the indicator reaches the other extreme.
