Using an Oscillator and Price Action to Trade

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Video Transcript:

Hello traders. Welcome to the eighth module of the advance technical analysis course, where we are going to put everything that we have learned together. In this lesson, we’re going to start with a simple system where we are going to use an oscillator and price action to day trade. When we are trying to build our system, you should start focusing on one indicator at a time. As you may know, my charts have a lot of indicators in them and every single one of those indicators has a purpose on my chart. When you’re starting out, you don’t want to clog your charts with lots of indicators. Sometimes, beginner traders will clog them with a lot of indicators that actually show you the same things. In this case, we are just going to use one oscillator, the oscillator of your choice and the pure price action to day trade. The easiest way to do this is to plug an oscillator into your charts and trade extreme levels. Just by using extreme readings on the oscillator and price action, you can start profiting from the financial markets.

Trading oscillator with price action

This very simple system works on any time frame, but you need to understand a couple of things before we go forward. The first thing is the higher you go, the longer you will have to hold your trade. This means that the higher time frame you use to analysis price action on and to trade off, the longer you will have to hold your trades. It’s not the same to trade the 50-minute chart at an extreme level of the 50-minute chart than an extreme level on the four-hour or daily chart. The lower you go, the more set ups you will get daily. This means that if you’re trading the five-minute chart or the fifty-minute chart for example, you will get a lot more set ups using just extreme levels and price action, than if you were trading the four-hour charts, for example. And of course, there’s something very important here. The lower you go, the more fake set ups you will experience because on the lower time frames, you will get a lot of market noise. You might get cut in some noise that is not an extreme level and you will get stomped out more often.

Psychologically speaking, if you don’t like to get stomped out a lot, you shouldn’t trade the one-minute or the five-minute chart. But if you are not comfortable holding your trade for hours at a time, you should not be trading the hourly or the four-hour chart. In this lesson, we will focus on the 50-minute chart for day trades and we’ll be looking to get 50 to 60 pips out of every trade. We are also going to look for at least a one to two risk to reward ratio. You need to trade during high volume hours and trade instruments that are volatile enough. This means that you should be trading Forex during the London and New York sessions or if you are trading stocks, you should definitely trade them during the New York session. If you live in Australia or in Asia, it’s alright to trade Forex during the Australian session, but you need to focus on the Asian pairs. Right now, we’re going to go right into the empty floor platform so we can look at these set ups and how we are going to trade this little system.

We are back and as you can see here, we have the Euro, Japanese yen chart on the fifty-minute time frame and we have plugged a stochastic oscillator with the default 14:33 levels. The first thing we are going to do is go to the hourly chart. When you go to the hourly chart, you are going to draw your overall levels of support and resistance. Let’s use red as resistance and blue as support. We have another level of resistance right here and we have a level of support right here, which we are going to change to blue. These are the overall levels on the hourly chart. Remember that we are going to be trading the fifty-minute chart. Let’s say that these are the levels that we are looking at and we are going to back to the fifty-minute chart and we are going to start looking at price action right about here. The first thing you can notice is this area of resistance that has been tested ones and this area of resistance that was tested as support right here and we went all the way back up. We are trapped in a very small 12-13 pip range, which is untradeable at the moment.

I mean, to trade a thirteen-pip range is really not profitable because you will never get the top and the bottom and you will be fighting with the markets to get out of it about eight pip so it’s not that profitable. But if you notice right here . . . just let me change the color of this rectangle . . . if you see right here, we have a very distinct dodgy that signals a real rejection to this 1:37, 35:8 resistance zone. When we get this distinct candlestick, you can also see that the stochastic oscillator is almost at an extreme level and has made a crossover. We actually can go short right here at this rejection candle, but the thing about going short right here is that we are shy of 80 pips from a very strong support level. What we need to do is wait for this level to break and for the stochastic oscillator to go beyond fifty so we can actually trade this on the short side and we can take profit right here for a 30-pip win. Right here we have a 30-pip win just using extreme levels on the stochastic oscillator and rise action. We have the first win here of 30 pips.

Trading price action

Then we have a very choppy price action to the down side, which is also untradeable in my point of view because if you see the stochastic oscillator at the extreme levels, it’s remaining oversold even though price actions is going to a down side. We are in a very strong down mode and we need to wait for price to break to the upside. This is a support level also that was broken and now, we have gone above it right here. But we are not going to try to trade this, we are going try and wait for the price to test back these lows or test back this area of support as resistance. Remember that when you are trading extreme levels with an oscillator, you also want price to retest back levels that it has broken previously. The area that we are looking at, it’s this area of previous report and we want price to test it as resistance. We get here a test of this area, but the oscillator is not at an extreme level. The oscillator comes above the 80 level right here. As you can see here, we have what I call a fake out. We have a blue candle that opens below the area of resistance, closes above, but then an immediate red candle that comes all the way down below the area of resistance.

This is a fake out. Now we can go short right here. A 10-pip stop is fine in this case because we are aiming for this area of support. If we are aiming for this area of support, we would want to put our target around three to four pips above the actual area because we our targets to get hit. Our targets should be around here and are entered here so its 26 pips win for a 10-pip risk on another profitable trade. Right now, on the same day, we already have 56 pips in the bag. Right now, we continue price action. We do have some other overbought levels right here, but truthfully, we are in the middle of this range so it is not very logical for us to go long or short in this case. If you truly are following price action, you can see that we have some kind of a head and shoulders right here with this high, this high, and this next high. When the neckline breaks, you get a calculated target of 20 pips, which is exactly the low right here. You have to follow price action, not only with extreme levels and retests of previous support of resistance. If you notice some chart patterns forming, you should definitely then trade them.

Right here is a good example of how to trade a nice extreme level with a stochastic oscillator. You can see right here, the price action is around this area of resistance. We did have had a push through the upside, but the push through the upside gave us an extreme reading. I wouldn’t really recommend to go short right here because we really need this trend line that was holding on the short term to be broken. This trend line and also this area of resistance to break to the down side, so the actual entry is right here. Why do we know that we are going to go short? We know that we are going to go short or we are going to look for short opportunities because our extreme level is above 80. When we come down and break with this immediate ascending trend line and this previous area of resistance, we can go short and, of course, target again the same area for a 30-pip win. By staying patient and following extreme levels and pure price action, we have made 86 pips on one day.


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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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