The Stochastic - a Momentum Indicator for Bigger Profit Potential

If you want to time your trading signals with greatA signal is generated when the lines cross.
accuracy then you need momentum indicators and ifThe zones above and below these two lines are
you are looking for one of the best look no furtherreferred to as stochastic bands.
than the stochastic. It is an essential indicator for allOverbought and oversold levels.
traders serious about making bigger profits so let's lookThe 80% value is used to show when prices are
at it.overbought and, the 20% value is used to indicate
Why is it such a vital indicator?when prices are oversold.
Quite simply, it gives you advance warning of shifts inThe Stochastic generates signals in various ways and
price momentum near important turning points allowingthe two below are very effective:
you enter the market with great accuracy for bigger1. Overbought Oversold
profits.When the 20% and 80% trigger lines are crossed the
An Introductionfollowing action is taken.
George Lane, who developed the stochastic indicator,Buy when the stochastic moves below 20% and then
concluded that in an up-trend, prices tend to close nearrises above that level and sell when the stochastic
their high, and in a down-trend, prices tend to closerises above 80% and then falls back below this level.
near their lows.2. Stochastic Crossovers
The further the price closed away from the low orCrossovers are very effective.
high the stronger the trend was likely to be.Buy when the %K line rises above the %D line and sell
We have all seen this in forex markets and this simplewhen the %K line falls below the %D line. You need to
observation was the basis for the stochastic indicator.be cautious of short-term crossovers that may
The stochastic indicator therefore is:generate "false" signals.
A momentum oscillator that can warn of strength orThe best crossover is when the %K line intersects
weakness in a currency in advance making it a greatafter the peak of the %D line (known as a right-hand
leading indicator to confirm trading signals against chartcrossover).
support or resistance.3. Stochastic Divergences
The Technical Bit!Divergences between the stochastic and the
Don't worry if you don't understand how the equationunderlying price trend also offer good signals to trade
works - it's a visual indicator and you can simply lookand are a great leading indicator for entering positions.
for the set ups on most major chart services so theIf prices are making a series of new highs and the
math's below is only for those of you who really wantstochastic is moves lower or crosses then you have a
to know - for the rest of you skip it and move to thewarning sign that price momentum is weakening and a
next paragraph.top may be at hand and vice versa in a bear market.
The stochastic is plotted as two lines %K, a fast lineCombining the Stochastic With Other Indicators
and %D, a slow line.The stochastic is probably the best momentum
The %K line is more sensitive than %Dindicator and can work with just support and
The %D line is a moving average of %K.resistance on your forex charts. It can also be
The %D line triggers the trading signals.combined with other momentum indicators to filter
The way the stochastic is plotted is actually veryfalse signals and the Relative Strength Index is ideal for
similar to the way a moving average is plotted.this.
Just think of %K as a fast moving average and %DIf you want to improve your forex trading strategy and
as a slow moving average.time you're trading signals with great accuracy, take a
The lines are plotted on a 1 to 100-scale.look at the stochastic indicator and you will improve
"Trigger" lines are normally drawn on stochastic chartsyour chances of currency trading success.
at the 80% and 20% levels.