Best Indicators to Use in Choppy Range Bound Markets
Today's video is about the best indicators to use in choppy range bound markets.
Click to play and watch in full below:
I am going to cover the following topics:
If you are looking for a new strategy to trade in a range bound market this one could be for you and I show you how to trade using the Stochastic oscillator.
Oscillators
Let us get into the first topic. I am going to discuss the oscillators. Oscillators are very popular?indicators . Best used at support or resistance in a range by market. Examples of oscillators are the stochastic oscillator commodity channel index and the relative strength index. I have mentioned this before, but it is worth understanding that all indicators always like price action. They only tell you what has happened based on historical price action, not what will happen. Always bear that in mind. Oscillators can be used to identify the turning points at support or resistance in a consolidating market and consolidation is when prices making equal highs and lows. Bound between a level of support and resistance.
Consolidation
Here we have a daily chart example and the Stochastic oscillator is positioned at the bottom of the chart consisting of two lines. The settings that I like to use are 9, 3 and 3.
The Stochastic oscillator identifies prices, potentially overbought or oversold. Overbought is when the indicator has a reading of 80 or above and oversold when the indicator has a reading of 20 or below.
Let us have a look at an example of overbought and oversold. The two lines, there is an 80 line just here which represents when the indicator is overbought and down here at the bottom. There is a 20 line that represents when the indicator is over. Just to show you a couple examples of overbought indicators are eight, two above here. Price section puts in a high moves down indicator. Here is over bought price section puts in a further high moves down. The indicator here is at 20 or below. Price action puts in a low and then moves back up. Hopefully you can see there that the indicators showing you when price action is overbought and oversold and can identify when price action may turn and put in a high or a low.
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Trading at Support or Resistance
I am going to show you a simple trading strategy trading at support or resistance within an area of consolidation. Set the charts up in the?MT4 platform .
I will show you how to put on the Stochastic oscillator. This is a day chart in front of me, the?EUR/USD . Come up to the navigator, left click, and then click on the plus next to oscillators left click. There is the Stochastic oscillator.
If you do left click, then it will come up with this window first, I have just been using it before. I like to set the period to nine, rather than five. I will leave everything else. The same colors, I like to change the colors a bit. I like to use green for the main. I like to thicken the lines at perfect and then click okay.
You will set on the bottom of the chart. Just come up to the top and I am going to just click on that little X to get rid of the navigator or you can come up to the bottom and left click on it.
I have got my daily chart. The EUR/USD with Stochastic oscillator on the bottom. I have drawn in some support resistance to show some consolidation areas. Just to show you a little bit of a strategy, you can trade on the daily chart. We had some resistance here where the market started to get a little bit of consolidation and re-visits resistance just there. You can see if we put my cross in that letter, moves up to the 80 level or just beyond showing that price is overbought. We can see price then moves back down. I am looking for the oscillators to be overbought at resistance and a simple trading strategy could just be then to wait for a break of a candle low. I get my drawing tool waiting for a break of a candle, get a break of a candle low just through here. On this particular day there, it breaks that one I have a stop above the height. I would be trading down to this level of support to see whether it can break or not. Obviously, it does break a little bit, but you can see that if you traded down from resistance, you could have taken profit down here, this area of support. The turning point here was referenced when the oscillator moved into the overbought area.
Price comes down and we actually come back up and re-visit the same resistance area, put in a little bit of a rejection candle oscillator. Here is overbought above the 80 level and then trading a break of that candle. A bit of a spinning top there and stop above the height. We can see a price move down to the next level of support. Does it hold? No, does not. It breaks through out of the consolidation area right? We can see price moves further down, just one and show this top as well. We have got an area of resistance drawn in from this top and obviously, price moves down it. This area of potential support, I will just draw that area in, then comes back up and revisits the top of the range here. Resistance, we can see the indicator is overbought. It actually has two attempts at this resistance level. If it did trade the break of that candle stick, just here, stops just above the high, you would have got it taken out there which is unfortunate. But then it puts in another, the rejection candle.
If you trade the breakout, that one, because the indicator is still in the overbought area, obviously price actually moves down and you stop to go above here. I am not trying to show you a setup that works a hundred percent of the time. It worked up here, it worked here selling down from resistance. It did not work here, but then the second chance, second attempt, where it fails at resistance. If you take that trade, it does work. Nothing works a hundred percent of the time. You just have to take the trade set up as you see it. Looking for price to fail at resistance in what looks a like consolidation, looking for the indicator to be in the overbought above 80 level and then trading a rejection candle. Trading the break of that low, putting a stop above the high. That is how I trade down from resistance.
I just get my drawn tool off. I have got an example here for the AUSD/USD on the daily chart.
I am just showing you this setup on a daily chart but it will work on a 4-hour chart and 1-hour chart, if you do the work and create your strategy. On the?AUD/USD ?daily chart, I have got a broad consolidation range drawn in. Let me get my drawing talk once more. We have this low drawn in support, this high level of resistance drawn in and price actions. Moving down, comes down to a level of support, tries to trade through, but then the next day we obviously trade and reverse back. When we are testing supports, I would close slightly below but this is a very major area of support. Indicator is below 20, it is in the oversold position. If you are waiting for price to reverse, break the?candlestick ?high, the candle that test is support. Stop below the low. You can see then if you took that trade price has been moving back up within the consolidator range and has not quite got up to resistance yet. Another trade may come together here. Price might further come up to this level. Reject indicators just starting to touch the overbought level. Price could come up to there today or tomorrow. You might see an entry to trade down, trading the break of that candlestick low to trade back down the range. That is how I like to trade using the oscillator on the daily chart, trading from support back up the range to resistance and then trading down from resistance back down the range once more.