How to Trade with the Stochastic 3 MT4 Indicator
The Stochastic 3 MT4 Indicator is a trading strategy which is based on the popular MT4 Indicator, the Stochastic indicator, to produce reliable buy sell trading signals. For this strategy, a few modifications has to be made to the indicator to get what we want out of the strategy setup.
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MetaTrader4 Indicator: Stochastics 3 MT4 Indicator.ex4. The indicator performs analysis on three time frames. For this strategy, the time frame settings are changed to 1hr (60mins), 4hr (240mins) and 1day (1440mins) on the setup window.
Preferred Time Frame(s): 1 hour chart or Higher
Assets Traded: The strategy can be traded on any currency pair.
Stochastic 3 MT4 Indicator Strategy and Trading Rules
The aim is to trade a crossover of the histogram bars of the Stochastics 3 MT4.ex4 indicator as they cross from negative to positive (buy signal) and from positive to negative (sell signal). This crossover of the bars of the Stochastics 3 MT4 indicator is used in conjunction with a technical entry signal on the chart, which for this strategy will be based on simple support and resistance lines drawn across candle lows and candle highs respectively.
Another strategy which can be used is the divergence strategy. Look for areas where the price action and the indicator histogram are displaying a divergence pattern, then trade the correction of the divergence by the price action.
These two strategies are explained using the trade setups below.
Long Trade Entry Rules
The long trade entry setup shown here is meant to trade off a support line when the Stochastics 3 MT4 indicator bars cross from negative to positive.
- Identify and draw a trend line across price lows.
- Check to see the position of the signal candle, which is the candle that forms within the first histogram bar after the Stochastics 3 MT4 indicator has crossed from negative to positive.
- The next candle is the entry candle. The entry should be made when price pulls back on the support line drawn in the first step. The setup is shown below.
In this chart, the support line is drawn with a yellow trend line and the signal candle is clearly identified. Allow the next candle which forms to pull back to the support line. When it does, the LONG trade is initiated.
Stop Loss and Take Profit Settings
The stop loss is set at a few pips below the support line. Due to the fact that this line is slanting upwards, it is safe to use an area which is lower than the candles preceding the signal candle as the stop loss area.
For the Take Profit, the point selected for the potential profitable trade exit is an area where a reversal candlestick pattern appears. In this scenario, we witness the formation of a bearish harami to signal a good point to exit the trade. Since this does not appear until the trade has moved to some distance, a trailing stop is applied to trail the price action until this point is attained.
Short Trade Entry Rules:
The short trade entry scenario deployed here is the divergence. We look for where price action has formed higher highs and where the indicator’s histogram highs are getting lower. A trend line is drawn across the price highs and trade is taken as follows:
- Identify the divergence (higher highs for price, lower highs for indicator).
- Initiate a SELL trade at the open of the next candle if the opening price is at the resistance line drawn across the price highs.
In this chart, the divergence and entry point are clearly shown.
Stop Loss and Take Profit Settings
The stop loss is set a few pips above the trend line which connects the price highs. This should be set high enough so that if price action moves above the trend line transiently, it will not trigger the stop.
The Take Profit point is chosen to be an area where a reversal candlestick signal appears. This chart example shows a bullish engulfing pattern.
Recommended Time Frames for Stochastic 3 MT4 Indicator
Technically speaking, you can use this MT4 indicator for all time frames. However, the shorter the time frame, you will see more fluctuation and possibly more whipsaw which may cause small losses that can eat up your portfolio quickly. We recommend that you use higher time frames like the 4H for better consistency.
Stochastic 3 MT4 Indicator Download
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