Day trading strategy based on oscillators

Everybody knows a fairy tale about the heroic orphan child Dorothy Gale and her little dog Toto whose house was blown into the Land of Oz by a tornado.

While we don’t know the exact reason for such an exotic strategy name, we may suggest that it may bring you the size of profits as unexpected as the Kansas house that has landed on the wicked witch. So, what exactly should you know before implementing this strategy?

The preparations

Timeframe: Daily, H4

Currency pairs: The system is widely used for trading EUR/JPY, but it also works well with other currency pairs.

Tools: Bill Williams’ Awesome Oscillator with standard settings, Accelerator Oscillator and Stochastic Oscillator with %K period = 5, %D period = 3 and slowing = 4. We recommend implementing a Stochastic Oscillator to the Accelerator one.

To do that, you don’t need to download a specific indicator. All you need is to choose the accelerator oscillator in the menu of your MT (Insert – Indicators – Oscillators – Accelerator Oscillator). Be sure that your navigator window is open (View – Navigator). At the final step, you need to hold out the Stochastic oscillator from the Navigator window to the Accelerator one (see the picture below). Easy as it is!

Why do we need so many indicators for this strategy? To make the magic work, we need to be sure about the reversal. That is why the signals require confirmation.

While the Accelerator Oscillator reacts to the change of the move quicker than the Awesome one, their combination makes a signal more reliable. The Stochastic Oscillator shows the overbought and oversold levels. These levels are important for determining entry and exit points.

Now, let’s learn the basic algorithm.

When do you need to open a long position?

Wait until the Stochastic oscillator crosses the 20 level from bottom to top.
After that, wait for both Accelerator and Awesome oscillators turn green.
Open your position at the opening price of the bullish candlestick.
We close our position when Stochastic crosses above the 80 levels together with the accelerator oscillator.
We place stop loss near the closest support to the entry.

Note: we don’t open a position if Stochastic crosses the 20 line, but Accelerator Oscillator doesn’t change its color.

Let’s have a look at the daily chart of EUR/JPY. There we can notice that all the conditions are met. When Stochastic crossed the 20 level from bottom to top, we did not rush to enter the market immediately because of the red Awesome Oscillator. When it finally turned green, we opened the position at the opening price of the next candlestick at 126.24. We waited several days for Stochastic and Accelerator indicators to cross above the 80 level and took profit at 129.3. We placed stop loss at 125.65, slightly above the significant support.

Now, let’s consider when you need to open a short position

At first, the Stochastic Oscillator should cross the 80 level upside down.
Then Accelerator and Awesome oscillators need to turn red.
Open your position at the opening price of the bearish candlestick.
We close our position when Stochastic lines cross below the 20 level together with the Accelerator Oscillator.
Stop loss will be placed above the closest resistance to the entry.

Note: we don’t open a position if stochastic crosses the 80 line, but Accelerator Oscillator stays green.

Let's consider the daily moves of EUR/JPY once again. On July 4, 2011, the Stochastic indicator crossed above the 80 level. We waited until both AO and AC turned red and entered the market at 116.97. We placed stop-loss slightly above the resistance level at 118.18. After that, we trailed our stop and followed the movement of a price. When Stochastic formed a crossover within the oversold zone and accelerator oscillator tested the 20 level we decided that it would be safe to close the position at 105.2. As a result, we earned a great amount of 1177 pips!

Conclusion

During the analysis, we found out that a combination of three oscillators may indeed bring very good results. Nevertheless, you should always make reasonable decisions and trail your stop losses.

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