What Is Stochastic Indicator And How To Use It

What Is Stochastic Indicator And How To Use It

The stochastic indicator measures overbought and oversold situations as well as the beginnings and endings of cycles in the forex market. This indicator is considered as an oscillator which indicates the position of the existing closing price of an index corresponding to the high or low range over a period of time. The idea behind this indicator is that the closing price will be nearer to the highest price whenever the market is trending upward, and vice versa. On the other hand, when the market is trending downward, the closing price will be nearer to the possible lowest price.To get more news about lymotrademart, you can visit wikifx.com official website.

The stochastic indicator is a bit harder to calculate compared to other indicators, but this is one of the most frequently used indicators. Nonetheless, this indicator can be calculated by following this formula:
Let’s take a look at an example, if the highest price equals 210, the lowest price is 200, and the current closing price is 209; then the high-low range is 10 and that is the denominator of the %K equation. So, the numerator of the formula will be 9. From the formula of %K, the value of %K will be 90%. %K will be 20% if the current close was at 202. However, when the current close is in the upper half of the range, the stochastic oscillator will be beyond 50 and when the current close is in the lower half the oscillator will be under 50. For the given time span, the price will be near its low when the readings are below 20 and when the readings are high means above 80, the price will be near its high.

Usually, traders utilize this indicator to assist them exit open trades before a trend change and enter when a new trend begins. This oscillator consists of two lines, one is %K line and another is %D line. Now, what you really want to know is some kind of rule which will tell you when to buy or sell rather than guessing by your eye.

To do so, you need to observe when the %D line and the price of the matter start to vary and shift into either the oversold or the overbought positions. As we explained earlier, when the indicator moves above 80 level that means prices will be near its high, so it will be high time for you to consider selling. In contrast, when the indicator will be below the 20 level it means prices will be near its low so you can consider buying. There is another assumption based on what you can decide when to buy and when to sell. According to that idea, when %K line crosses over %D line, it will be considered as a buy signal for you and for sell signal, you can follow the other way around.
While trading with the stochastic oscillator in a trending market, you should not expect it to work always. Because if you trade with oversold-overbought technique, you have probably noticed that it works better in a sideways or oscillating market, where the market doesn’t have any well-built trend or direction. Otherwise, while trading in a strongly trending market, it will be difficult for you to interpret when to go short and when to go long. If you can get the right moment to enter the market, it will be very productive, but if you can’t it will be much costlier for your portfolio.

Some traders use the stochastic indicator in combination with moving averages in a trending market. By using the stochastic indicator this way, you can buy when the stochastic is oversold and sell when overbought. But there is a difference when a new trend opens, you can only buy when the stochastic is oversold, but when overbought, do not try to follow it and stay away from trading.

However, in ranging market this indicator works pretty well. Despite of that, there are some strategies that you can follow. You can go long on %D, where the first channel is below the oversold level and when %K or %D drops under the oversold level and ascends back beyond it. Again, when %K crosses above %D you can consider to go long. In case you want to go short, there are some tactics as well. For example, where the first peak is above the overbought level you can go short on %D and when %K or %D ascends above the overbought level then drops below it. Also, you can go short when %K crosses below %D in these situations.