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