# How to Use the Stochastic Indicator

The charted stochastic oscillator actually consists of two lines: The percentage price oscillator, which measures momentum, is among the more sophisticated tools in the technical analysis arsenal. The main difference between fast stochastics and slow stochastics can be summed up in one word: This is a crucial part of the strategy because we only want to be trading in the direction of the higher time frame trend. An error occurred submitting your form. Leave a Reply Cancel reply You must be logged in to post a comment.

Stochastic Oscillator Forex trading strategy — it's an interesting system with a rather low fail personalbank.cf's based on a standard Stochastic Oscillator indicator, which signals a trend fatigue and change.

## How to Trade Forex Using the Stochastic

Stochastic is a simple momentum oscillator developed by George C. Be ing a momentum oscillator, Stochastic can help determine when a currency pair is overbought or oversold. Since the oscillator is over 50 years old, it has stood the test of time , which is a large reason why m any traders use it to this day. Slow stochastic is found at the bottom of your chart and is made up of two moving averages.

These moving averages are bound between 0 and 10 0. Traders are constantly looking for ways to catch new trends that are developing. As a result, a trader using stochastic can see these shifts in trend o n the ir chart. Momentum shifts directions when these two Stochastic lines cross. Therefore, a trader takes a signal in the direction of the cross when the blue line crosses the red line. As you can see from the picture above, the short term trends were detected by Stochastic. However, traders are always looking for ways to improve signals so they can be strengthened.

There are two ways we can filter these trades to improve the strength of signal. Some signals are stronger than others. The first filter we can apply to the oscillator is taking cross overs that occur at extreme levels. Since the oscillator is bound between 0 and , overbought is considered above the 80 level. On the other hand, oversold is considered below the 20 level. Therefore, cross downs that occur above 80 would indicate a potential shifting trend lower from overbought levels.

Likewise, a cross up that occurs below 20 would indicate a potential shifting trend higher from oversold levels. The second filter we can look to add is a trend filter. If we find a very strong uptrend, the Stochastic oscillator is likely to remain in overbought levels for an extended period of time giving many false sell signals. We would not want to sell a strong uptrend since more pips are available in the direction of the trend. Therefore, if we find a strong uptrend, we need to look for a dip or correction to time a buy entry.

That means waiting for an intraday chart to correct and show oversold readings. At that point, if Stochastic crosses up from oversold lev els, then the selling pressure and momentum is likely alleviated.

This provides us a signal to buy which is in alignment with the larger trend. Therefore, if we filtered trades according to the trend on a daily chart, then only the long signals green arrows would have been taken.

Therefore, traders us e Stochastic to time entries for trades in the direction of the larger trend. Try it out for yourself. Try it out for yourself in a practice account. Not sure how to manage your risk on a trade? Fast Stochastics vs Slow Stochastics 46 of The Relative Strength Index. Learn how to incorporate other strategies and techniques into your trading to be a better trader by signing up for our free guide , Traits of Successful Traders.

A low value point to the strong uptrend as much as it points to a strong downtrend. A high value points to the strong downtrend as much as it points to a strong uptrend.

Stochastic oscillator works best when used with leading indicators , chart patterns, and volume and price movement. The trend following strategy can be a profitable one to use with stochastic 6. Stochastics oscillator must be paired with multi-frame analysis. A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time.

It is one of the earliest technical oscillators in securities trading used to predict future market direction. It is important to grasp this concept right from the beginning. Once you understand, you will position yourself way ahead of other traders out there. It is important to note that. All indicators built into a trading platform are being computed based on price data fed into that platform. There are four dimensions of the price — Open, Close, High, Low All indicators are a different versions of the same data source.

Equation and time sets might change but the core of all of the is the same. To easily verify this, you can go to Meta Editor in Meta Trader4 And open the core files of any lagging indicator you wish. After inspecting the code, you will realize they are all using difference equations but the same core data.

None of lagging indicators you are currently using are capable of predicting future price. Price is influenced by external factors, not the indicators. Having said that, making correct judgments even some of the time can be very rewarding and Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy.

There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. First off, there is a wrong belief that stochastic can point to overbought or oversold levels.

A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal. There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below Follow instructions below 1 2 Select any of the indicators, select symbol, select timeframe, select visual mode and time period, Click start You will now see the price action unfolding on the screen together with the indicator of your choice.

As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly.

Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal. When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis. Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks. Buying would not be a great idea! Traders use indicators for technical analysis in order to gain useful additional information.

Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy. Look at it this way: To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements.

Stochastic MUST an add-on to a much larger, sound trading strategy. This is its role! Take a look at the setup below. Stochastic oscillator in this case serves as an additional confirmation of the reversal and plays a part within larger trading strategy. The reverse holds true for a downtrend. Trend following is one of the most used strategies in forex trading.

Stochastic can be used to enter the market on pullbacks within the trend.

## 9 Powerful Forex Trading Strategies

The Forex Stochastic Strategy Bonus Method: Here is another way to use the stochastic to identify the reversal point of the market. With this bonus method, you . The stochastic oscillator is a momentum indicator that is widely used in forex trading to pinpoint potential trend reversals. This indicator measures momentum by comparing closing price to the. Stochastic Indicator The stochastic indicator is an oscillator that measures overbought and oversold conditions in the market. It helps us determine where a trend might be ending.