When people first learn about trading with stochastics, it seems so ridiculously simple. We're all taught that there are several ways you can trade stochastics. The most common methods that are taught are usually to buy when the lines cross above 20 or when the stochastic lines cross each other in an upward direction. You are supposed to sell whenever the lines drop below 80 or whenever the lines cross each other in a downward direction. Sure, there are other ways of trading stochastics, but those are the most common methods.
Doesn't it sound like a child could do this? You just trade whenever x happens. What most people usually do when they learn the rules of trading stochastics is that they immediately pull up a chart to back test the strategy. When backtesting the strategy, it looks like a home run. Almost everytime you see lines cross or go above or below 20 or 80 they look like winners, don't they? This is what is called false advertising. You don't have to take my word for it. You can trade the stochastics using these methods to see for yourself.
What you'll notice is that the lines cross and go above 20 or below 80 a bunch more times than you noticed in backtesting. That's the thing you don't see: All the times the lines crossed for a little while then reverted back as well as all the times the lines dipped below 80 or above 20 only to revert back. That's the problem with indicators like stochastics. They lag. They lag big time.
You have to think about this logically. 95% of forex traders fail at making money. If something as simple as trading with stochastics can make you successful, why do most people fail? Simply because stochastics are telling you absolutely nothing about market price and market movement. Do yourself a favor and just eliminate all the indicators on your chart. Try to see it the way the pros (those 5% of people that are making money) see it. They can look at something as simple a bar chart and be able read the energy of the market.
To get rid of those stochastics and finally start seeing the forex markets in a brand new light, make sure to check out my squidoo lens.
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