How to Use Technical Indicators to Trade Volatile Assets - Part 2

How to Use Technical Indicators to Trade Volatile Assets - Part 2

Submitted by adil on Wed, 08/06/2014 - 19:30

Technical Indicators to Trade Volatile Assets Pt. 2

In the first part of the tutorial, a technical indicator was analyzed to see how it could increase profits by trading volatile stocks. In this part, we will review how another indicator can be used to make more money by trading volatile assets.

Stochastic Oscillator:

It is another very effective indicator to trade the most volatile stocks. It is applied to a ranging stock, a stock that doesn’t follow any trend. This strategy takes into account the fact that every volatile stock price usually settles within a range before moving in a particular direction.

It is very critical to remember that a sudden price movement can quickly change a winning position into a losing one, hence a reversal confirmation should be used before trading. The Stochastic Oscillator provides the required confirmation.

How to use the indicator:

When the price movement is not following any trend, and the price mostly remains on the sides, the trader should sell around the top of the range just when the Stochastic moves above 80 and drops again below. The stop should be placed above the top and the target should be placed about 75% of the way down the range. For example, if the range is $1 when moving from low to high, place a target at $0.25 after the low.

If the Stochastic drops below 20 and then moves above it, it’s time to take advantage with a long position close to the range bottom. The stop should be placed below the low and the target should be placed about 75% of the way up the range. For example, if the range is $1 when moving from high to low, place a target at $0.25 before the high.

In both cases, trades are committed as soon as the price moves beyond the set Stochastic trigger level. Make sure to not waste much time now and letting the price bar become complete. At the time the price bar becomes complete, the price would have moved too closer to the target and the ideal time would have already gone.

Ignore everything and let the price hit the target or stop level. There will be another opportunity at hand if the price remains within range even after hitting the target level. Figure 1 shows such a situation.