Richard has more than two decades of experience in the financial markets and has had his writing appear on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine
Oz may be the affectionate nickname for Australia, but that is not where this trading strategy gets its name. Instead, the traders who first devised this strategy have named it after the captivating and enchanting Baum tale, The Wizard of Oz. In this story, the heroine Dorothy Gale and her dog, Toto, find their homes blown away into a magical land called Oz by a tornado. It is this magic and mysterious power that the founders of the strategy were alluding to when they named it the OzFX strategy. As far as trading strategies go, it is indeed powerful and profitable – after this explanation, it need not be mysterious any more.
This strategy has a daily timeframe
As a trader, you’ll always be trying to spot a new trend as it emerges. One of the best ways to do this is via the Stochastic oscillator. It consists of two lines: a red one and a green one.
The red line forms a signal line, while the green one trails the price movement. These two lines are bound between 0 and 100. Then, there are also two extra points, 20% and 80%, which show you the overbought and oversold areas respectively.
The sell signal is triggered when the green line touches or goes over the 80% barrier and crosses the red line. After the crossover, the green line should fall below the red line.
The buy signal, on the other hand, is triggered when the green line overtakes the 20% mark and crosses the red line. After the crossover, the green line should be above the red line.
The indicator consists of two scales: positive and negative. The middle line of the oscillator is a zero point. It separates negative territory from positive territory. If the histogram crosses it and goes in a downward direction, you have a sell signal. On the other hand, you have a buy signal if the histogram crosses the zero mark and moves upward.
The primary indicator for the point of entry is AC. Use Stochastic to identify any false entries that may be presenting themselves as authentic ones out of the equation.
If Stochastic gives you a buy signal and the AC green lines also move into the positive territory, it is safe to enter the market long.
If Stochastic gives you a sell signal and the AC green lines also move into negative territory, it is safe to enter the market short.
Once you have identified your points of entry, open five lots rather than just one. Assign a stop loss at 100 pips to each lot. Your take-profits should be placed in the following order:
The crucial piece of forex trading advice here is that when your first order reaches take-profit, you must shift your other orders into the “break even” point. Failing to do so upsets the rationale of the OzFX strategy and negatively impacts any other potential profit taking.
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