| If you want to time your trading signals with | | | | stochastic charts at the 80% and 20% levels. |
| great accuracy then you need momentum | | | | |
| indicators and if you are looking for one of | | | | A signal is generated when the lines cross. |
| the best look no further than the stochastic. | | | | |
| It is an essential indicator for all traders | | | | The zones above and below these two lines are |
| serious about making bigger profits so let's | | | | referred 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 of | | | | overbought and, the 20% value is used to |
| shifts in price momentum near important | | | | indicate 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 in | | | | crossed 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 the | | | | stochastic rises above 80% and then falls |
| low or high the stronger the trend was likely | | | | back below this level. |
| to be. | | | | |
| | | | 2. Stochastic Crossovers |
| We have all seen this in forex markets and | | | | |
| this simple observation was the basis for the | | | | Crossovers 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 of | | | | crossovers that may generate "false" signals. |
| strength or weakness in a currency in advance | | | | |
| making it a great leading indicator to | | | | The best crossover is when the %K line |
| confirm trading signals against chart support | | | | intersects 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 the | | | | Divergences between the stochastic and the |
| equation works - it's a visual indicator and | | | | underlying price trend also offer good |
| you can simply look for the set ups on most | | | | signals to trade and are a great leading |
| major chart services so the math's below is | | | | indicator for entering positions. |
| only for those of you who really want to know | | | | |
| - for the rest of you skip it and move to the | | | | If 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, a | | | | momentum 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 %D | | | | Combining 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 actually | | | | be combined with other momentum indicators to |
| very similar to the way a moving average is | | | | filter false signals and the Relative |
| plotted. | | | | Strength Index is ideal for this. |
| | | | |
| Just think of %K as a fast moving average and | | | | If 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 | | | | |