Simple Stochastic Overbought OverSold Trading Strategy

One of the most popular trading strategies out there is the over bought and over sold indication with the stochastic. When combined with the understanding of where major supports and resistances are and used on higher time frames it is a very effective way of trading that has a high success rate.

Before i go any further i want to share that all strategies have there weaknesses so knowing where the strong resistances are and strong supports is definitely going to help you here as well as abiding by the simple rule of trading within the over all trend.. This is essential to reduce risk and loss.. Also money management is always good so use your stop losses and stick with them as well.. Okay so back to the strategy.

Sell on Overbought or Buy on Oversold

The strategy like i said is very simple, jump over to the time frame of either 1 hour, 4 hour or Daily, each one of these is really good for this, then add the simple stochastic that should be available with your trading platform, set it to 14, 3, 3. It is standard in Mt4. Then look for places that are over bought to sell plus taking note that a major support is not below to ruin your trade plus that you are going in the trend. The below image shows a great example of this to show three good entries. I recommend placing a stop at least 50 pips from entry, sometimes more up to 50 depending on the way the chart is showing the trend, if strong less is generally fine, if mild 50 is more safe. You need to be the judge on that one.

overbought oversold forex strategy

The above image shows the AUD / USD chart 4hour with three good entries, one for a total possible of over 400 plus pips profit if you only used the adjust stop loss method.. Click image for a larger detailed view.

Secondly you want your risk reward to be at least two times. This can be achieved safely by allowing your trade once it is going your way to adjust stop loss into the profit area immediately after it passes 40 pips in profit to say a few pips in the profit zone to cover spread. This is often called break even and it means that once you do this you are on a safe free trade. Now once the trade moves further you want to move the stop loss little by little a little further into profit leaving at least 50 pips space between it and the current price.

zoomed in stochastic overbought strategy

Lastly you want to then place your overall take profit area at least 2 times like i said, so if your initial stop loss was 40 to 50 pips then you want to place it at 80 to 100 minimum, if 50 was the initial then 100 is what you are going for. As this is the higher time frames this is not hard, just remember to adjust your stop loss as it progresses further into profit, that way you have more control over the market and if all of a sudden it changes to go against your trade direction your stop loss gets you as much profit as possible. A good trailing stop is such a valuable tool in trading.

The Trailing Stop Method instead of Take Profit

Another method one can use is effectively is the good old trailing stop, how this works is you add it to the trade details once the trade goes around 40 to 50 pips in your favour rather than adjust stop loss each now and then. It then allows you to keep on the trade and when finally the trade turns against you it is stopped out in in the profit zone.. This is a great example with the above image. If you used a 50 pip trailing stop once the trade went 50 pips in profit, then you would have bagged more than 150 pips on the first trade, more than 100 on the second and more than 100 on the third. That’s a total of over 450 pips on that one trading pair, not bad hey.. In fact if you used a larger trailing stop on the first trade you could of bagged a total of over 400 pips.. Each style has its own risk / reward factor however and i always recommend putting the stop loss at breakeven as soon as you can.. This is my most advised money management technique..

I suggest when trying this method for the first time that you do so a few times in demo to see how it works and performs for you. That way when you are trading money for real you will feel more confident in the decision process thus getting more success..

About Timon Weller

Timon Weller is the professional Writer and Trader behind the blog Forex Reviews. Timon Weller is also a professional Teacher of Price Action Trading and creator of the popular Training Series teaching people how to trade Price Action effectively called The Engulfing Trader. For other Forex Training available here at Forex Reviews click here.

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  1. Hello Tim. Thanks for this wonderful article. Over several videos I have seen on the stochastic, There was 1educational video from where an actual professional trader talked about changing the settings of the stochastic to 15,5,5. Have you always used the default settings but with the new set of numbers it makes the lines appear much smoother. Thoughts ?

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