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The Stochastic - a Momentum Indicator for Bigger Profit Potential

If you want to time your trading signals withstochastic  charts at the 80% and 20% levels.
great accuracy then you need momentum
indicators and if you are looking for one ofA  signal  is generated when the lines cross.
the best look no further than the stochastic.
It is an essential indicator for all tradersThe zones above and below these two lines are
serious about making bigger profits so let'sreferred  to  as  stochastic  bands.
look  at  it.
Overbought  and  oversold  levels.
Why  is  it  such  a  vital  indicator?
The 80% value is used to show when prices are
Quite simply, it gives you advance warning ofoverbought and, the 20% value is used to
shifts in price momentum near importantindicate  when  prices  are  oversold.
turning points allowing you enter the market
with  great  accuracy  for  bigger  profits.The Stochastic generates signals in various
ways  and  the  two below are very effective:
An  Introduction
1. Overbought  Oversold
George Lane, who developed the stochastic
indicator, concluded that in an up-trend,When the 20% and 80% trigger lines are
prices tend to close near their high, and incrossed  the  following  action  is  taken.
a down-trend, prices tend to close near their
lows.Buy when the stochastic moves below 20% and
then rises above that level and sell when the
The further the price closed away from thestochastic rises above 80% and then falls
low or high the stronger the trend was likelyback  below  this  level.
to  be.
2.  Stochastic  Crossovers
We have all seen this in forex markets and
this simple observation was the basis for theCrossovers  are  very  effective.
stochastic  indicator.
Buy when the %K line rises above the %D line
The  stochastic  indicator  therefore  is:and sell when the %K line falls below the %D
line. You need to be cautious of short-term
A momentum oscillator that can warn ofcrossovers that may generate "false" signals.
strength or weakness in a currency in advance
making it a great leading indicator toThe best crossover is when the %K line
confirm trading signals against chart supportintersects after the peak of the %D line
or  resistance.(known  as  a  right-hand  crossover).
The  Technical  Bit!3.  Stochastic  Divergences
Don't worry if you don't understand how theDivergences between the stochastic and the
equation works - it's a visual indicator andunderlying price trend also offer good
you can simply look for the set ups on mostsignals to trade and are a great leading
major chart services so the math's below isindicator  for  entering  positions.
only for those of you who really want to know
- for the rest of you skip it and move to theIf prices are making a series of new highs
next  paragraph.and the stochastic is moves lower or crosses
then you have a warning sign that price
The stochastic is plotted as two lines %K, amomentum is weakening and a top may be at
fast  line  and  %D,  a  slow  line.hand  and  vice  versa  in  a  bear  market.
The  %K  line  is  more  sensitive  than  %DCombining the Stochastic With Other
Indicators
The  %D  line  is  a  moving  average  of %K.
The stochastic is probably the best momentum
The  %D  line  triggers  the trading signals.indicator and can work with just support and
resistance on your forex charts. It can also
The way the stochastic is plotted is actuallybe combined with other momentum indicators to
very similar to the way a moving average isfilter false signals and the Relative
plotted.Strength  Index  is  ideal  for  this.
Just think of %K as a fast moving average andIf you want to improve your forex trading
%D  as  a  slow  moving  average.strategy and time you're trading signals with
great accuracy, take a look at the stochastic
The  lines  are  plotted on a 1 to 100-scale.indicator and you will improve your chances
of currency trading success.
"Trigger" lines are normally drawn on



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