Imagine, if you will, a giant ocean with tides, waves and ripples. Short term traders focus on the ripples — market movements that occur day to day or intraday. If you were to trade these ripples without taking into account the direction of the tides and the waves, good trades may find themselves losing money simply because the market zigged when you thought it would zag. The Stochastic Power Play aims at trading the ripples only when they are in line with the waves, and when the waves are in line with tide, ensuring a solid foundation for decision-making.
Stochastic is an oscillator indicating information about trend strength and momentum. It assumes that near-term market movement is random but the pattern of randomness will follow a longer term trend.
Imagine a man walking a dog on a leash. The dog moves side to side at random based on whatever grabs its attention, but the pattern of randomness follows the path the man is walking. Stochastic gives a wealth of signals; the most basic is the trend-following crossover. Crossovers can occur with the two stochastic lines, %K (the dog) and %D (the man), crossing each other or when they cross above or below the upper and lower signal line.
This indicator can be found embedded in the IQ Option chart under the tabs in the lower left hand corner. For this analysis, most traders start by using the standard settings and adapt it according to their preferences.
This is a multiple time frame strategy using the longest time frame to set the tide or trend of the market. The middle time frame represents the waves and the shortest will be the ripples. The long term time frame is one day, the middle is one hour, and the short term can be anything from 1 minute to 10 minutes, depending on the type of expiry you like.
Power Play Tactic
Ideally you would want to wait for a strong signal to occur on the daily chart. A strong signal is when both stochastic lines are moving in the same direction as the crossover. This would coincide with key market news, a bounce from a long term trend line, or some other event that generates a strong movement. If stochastic is moving up following a bullish crossover the tide is rising. Meanwhile, if stochastic is moving lower following a bearish crossover, the tide is in retreat.
Once that is established, move down to the one hour chart and assess the situation at this level. Ideally you again want to wait for the next strong signal to occur. If that signal is in-line with the daily chart, meaning that is it is indicating a trade in the same direction as the higher time frame, you can move down to the lowest level. If not, then you do need to wait for the next crossover to occur with the caveat of re-checking the higher time frame when it happens to be sure the analysis is good.
The lowest time frame is where the rubber hits the road. If the daily and hourly charts are in alignment indicating the tide and the waves are moving in the same direction, then all crossovers in line with that analysis become potentially-viable entry signals. These signals remain good until prices reach the extent of the move as indicated by the hourly charts.
At that time traders are advised to take a step back from the market and reassess the situation starting with the daily charts. Used correctly, stochastic offers traders helpful signals and is definitely worth giving a try.Trade now