Stochastic indicator is an indicator indicator developed by George C. Lane in the 1950s utilized in technical analysis. It compares closing prices in a market to the high and low prices for that market over a specific period of time. The Stochastic oscillator enables traders to figure out where a trend might be ending. Stochastic can be utilized to determine when a market is overbought or oversold. As indicated by technical analysis, when the stochastic oscillator rises above (transcends) 80%, the market is overbought, and when the oscillator dips under 20%, the market is oversold. Therefore stochastic gives us strong signals when to buy and also when to sell.
Forex traders need to take into consideration when using Stochastic that the forex market, being a twenty-four hour market, has no closing prices. Forex traders regularly utilize the price at the closing time of the New York Stock Exchange’s as the forex market’s closing price, since the volume of trading drops off not long after the end of the NYSE.
How to trade using stochastic indicator;
The Stochastic let us know when the market is overbought or oversold.
The Stochastic is scaled from 0 to 100.
At the point when the Stochastic lines are above 80 (the black line in the chart above), at that point it implies the market is overbought. It means that the buyers in the market would soon be exhausted, that is, this upward trend might soon come to an end.
At the point when the stochastic lines are underneath (below) 20, at that point it implies that the market is oversold. . It means that the sellers in the market would soon be exhausted, that is, this downward trend might soon come to an end.
As a dependable guideline, we buy when the market is oversold, and we sell when the market is overbought.
Looking at the chart below, based on this information, can you guess where the price might go?
If you said the price would drop, then you are totally right! Since the market was overbought for a long period of time, a reversal will undoubtedly occur.
That is the fundamental of the Stochastic.
A lot of Forex traders use the Stochastic in various ways, however the main purpose of the indicator is to show us where the market conditions could be overbought or oversold.
Over time, you will figure out how to use the Stochastic to fit your own personal forex trading style.