This system is said to be very profitable by the people who has been using it for quite a while. It is quite easy for grasping the concepts used by this system and can be mastered within 2 weeks if serious practice time is put into it. We will only be using 1 indicator and this will the stochastics with the default setting of 8,3,3. Nothing more.
We are going to work on the M15 timeframe but the higher timeframe we jump to, the better as there will be less noise... so this system should be working on any timeframe from M15 and above and will work on any pair as well but it is suggested you stick to the majors.
After we have our chart and the stochastics indicator sitting on it, we are going to wait for the stochastics to move into the oversold or overbought territory. We will be looking for a buy setup in the oversold territory and a sell setup in the overbought territory. If the stochastics is below the 20 level, we will interpret this as oversold and if it is above the 70 level, we will interpret it as overbought. This is infact a very simple process and a little practice hunting for these will turn you into a pro in no time.
After we have determine whether price is in overbought or oversold, we need to look for the main trigger or the hero of the movie if you want We need to look for an INSIDE BAR. First you got to know what is an inside bar...
There is nothing fancy with an inside bar. It is very easy to spot on the charts. An inside bar is simple when the current bar is LESS or EQUAL to the bar on its LEFT. That is how it looks:
As you can see above, the bar in the spotlight is the inside bar... The bar is within (engulfed) by the bar on its left. We will call such bars, the INSIDE BAR.
INSIDE BARS are infact very powerful trading setups which is most oftenly neglected. Infact, an INSIDE BAR tells us the the price is congested and restricted into a zone and volatility is building up slowly.. just like a pressure cooker And what happens when there is enough pressure in the cooker? It explodes and steam rushes out... The same happens when the price break free from the bar which engulfed it... After we have indentified the inside bar, we need to know how to trade it.
We need to take from the first step again. If we saw that price is in OVERBOUGHT, we will look only for a SELL setup and if we see that price is in OVERSOLD, we will only look for a BUY setup. This is the first rule.
After that, we need to look for an INSIDE BAR which should form on the chart and identify it. The bar should be in the overbought and oversold region as well and should match the stochastics position.
If we are looking a BUY position after we determined that price is in oversold, and we have our INSIDE BAR identified as well, then we will wait for the price to break the range on the upside and move between 1-5 pips... if it does, then we immediately open a BUY order.
If we are looking for a SELL position after we have determined that price is in oversold and we have already identified our INSIDE BAR as well, then we will wait the price to break the range from the downside and move a few pips between 1-5 pips... if it does, then we open a SELL position immediately.
As you can see, the main trigger of the trades is the break from the range on an INSIDE bar.
STOPLOSS AND TAKEPROFIT
Stoploss and Takeprofit will greatly depend on the timeframe you are using as well as the pair. On a small timeframe, you will aim for a smaller rewards and on higher timeframes, you will aim at bigger takeprofits. I suggest that you let the profits run and use trailings stops such as a fixed trailing stop, or a stop based on recent support and resistance (highs/lows)... You should focus more on cutting the risk and in such an attempt, you should breakeven your trades as soon as it has moved some good pips in your favor.. then after that, you can sit and watch the trade running hoping to catch more pips that from a trade with a fixed takeprofit. By playing with the money management as well as the takeprofit and stoploss, you can make this system suit your own style, therefore making it your own. Have some good practice with it and hope you will be making some good green pips. Good luck