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The Relative Strength Index (RSI) and the Stochastics oscillator are popular indicators on any trading chart. These two popular tools can be taken together with a couple of Moving Averages to offer a straightforward, yet effective system for recognizing profitable trades.

In this article we’ll explore a Forex Trading Tactic making use of the RSI and the Stochastic oscillator taken together with two Exponential Moving Averages (EMA). While not terribly complex these indicators, when combined, put the odds of a rewarding forex trade heavily in favor of the trader.

We all know the RSI is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to establish overbought and oversold conditions of an asset. The RSI crosses over a 50% line showing a positive or negative bias. A reading exceeding 70 is getting near overbought; while a reading below 30 is reaching oversold. Standard value for the RSI is 14.

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The Stochastic oscillator is a well-known old friend to all technical traders. It is a technical momentum indicator that compares a security’s closing price to its price range over a given time period. The oscillator’s sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. It has a range of 0 to 100. A reading below 20 is considered oversold; while a reading over 80 is considered overbought. Standard setting for the Stochastics oscillator is 14,3,3.

Now, let’s merge these two indicators with two Exponential Moving Averages (EMAs). An EMA differs from a Simple Moving Average in that higher significance is given to the more current data when figuring the average and therefore is considered a more precise, more timely indicator. When all these are pointing in the same direction, we get a set-up for a trade where the odds are heavily in the trader’s favor.

This is a little difficult to make clear without the benefit of graphics. If you’re acquainted with how these indicators perform, it should be manageable. You can always visit our site for a comprehensive discussion with charts.

The rules for getting into a trade are: 1) the 5 EMA has to cross over the 10 EMA; 2) the RSI has to cross above or below the 50% line; 3) the Stochastics need to cross up or down as well, but not go higher than the 20 or 80 levels. All three have to take place, all at the same time and all pointing in the same direction. It’s also a good plan to check the higher timeframes, H4 and D1, to see that you are trading in the direction of the general trend.

When you have your indicators line up like this…it’s a reasonably strong indication that you’re safe getting into the trade. You could stagger your take profit levels as some signal providers I’ve seen advise. Take one-third at 10 pips, another third at 20 or 25 pips and let the last third proceed with a trailing stop loss.

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