Trading strategies can be based on more than one indicator. This is the case of the Stochastic RSI strategy I am going to present to you today. It combines the Exponential Moving Average, the Relative Strength Index and the Stochastic Oscillator.
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Creating IQ Option template to trade the Stochastic RSI trading strategy
Can I use Stochastic and RSI together?
The Stochastic Oscillator and the Relative Strength Index are indicators included in the oscillator group. In many situations they follow a similar pattern on a price chart. So is there any point in using both at the same time? The answer is YES. But it has to be done in a smart way. Our strategy today uses not only oscillators but also a trend filter, the EMA200. Oscillators are used in a non-standard way, as you will see shortly.
Chart preparation for the Stochastic RSI strategy
The first thing you should do is to go onto your IQ Option account, choose the financial instrument for the session and add the three indicators to your chart. To do that, click on the Chart analysis icon on the left side of the platform and find the MA, the RSI and the Stochastic.
Once they are all attached, you can save your template by clicking the Save button underneath the three indicators displayed in the Chart analysis window. You can name the strategy in a way it will be easy to find it later. In the exemplary screenshot below it is simply called EMA200+RSI+STOCH. My job is to remember that this template is for trading the Stochastic RSI strategy
For the needs of this strategy, the period of the Exponential Moving Average should be set at 200. The rest of the indicators should be left by default.
The EMA200 function is to filter the trend. So you can open long positions when the prices are above it, and short trades when the prices are below the EMA200.
The RSI serves to capture hidden divergences.
And the Stochastic Oscillator will give a signal to enter the transaction after you have identified the trend with the EMA200 and have found divergences with the RSI.
Trading with the Stochastic RSI strategy
First, look at the EMA200. If the prices run above it, you can start to look for divergences.
Observe the RSI indicator. You are looking for the situation when the price is forming higher lows but the RSI is creating lower lows at the same time. You can draw the lines so it is more visible. Take a look at the picture below. The price is clearly rising while the RSI indicator line is falling. This is a hidden divergence, which allows you to trade pullbacks in direction of the main trend.
The last step is to wait for the next crossover on the Stochastic indicator. When this happens, you should enter a long position on the next candle.
You should place a stop loss just below the nearest swing low. Place a take profit at the level twice as big as risk defined by your stop loss.
The example below shows the USDCHF chart where the opportunity to enter a short trade appears. The first thing you should look at is the EMA200. If the prices are situated below it, the downtrend is identified and you can start looking for divergences. In order to do that, analyse the highs on the price chart and in the RSI window. When you discover that the RSI line creates higher highs, check if the price is making lower highs at the same time. If this is the case, wait for the cross down on the Stochastic. This will be a signal to enter a short trade.
Your stop loss should be set just above the nearest high. The target should be two times bigger than the risk.
Summary of the Stochastic RSI strategy
The Stochastic RSI strategy is quite simple in use yet, very profitable. It requires you to add three indicators to your chart and then watch them one by one. First, identify the trend with the EMA200, then find the hidden divergences with the RSI and finally, wait for the signal from the Stochastic Oscillator crossover to enter the trade.
The most important step in today's strategy is to be able to recognise the hidden divergences.
The best place to practice trading with the Stochastic RSI strategy is the IQ Option demo account. It is not only free of charge but also supplied with virtual cash that you can replenish any time you want. You get time to train using the strategy without risking your money. Once you gain confidence in using it, you can move to the live account.
Share your thoughts on the strategy that combines the EMA200, the RSI and the Stochastic Oscillator in the section comments below. I would be happy to hear from you.
Good luck!