In Forex Trading, Stochastics (Slow and Fast) are one of the most used technical indicators. To use them right, we need to know what they are. In this article, I'll mostly talk about Stochastics and how to use them when trading.
The stochastic oscillator is a momentum indicator that compares the price of a good at the end of a given time period to its price range during that time. The most important thing to know about this indicator is that prices tend to close close to their previous highs in bull markets and close close to their previous lows in bear markets. When the stochastic oscillator crosses its moving average, this is a signal to buy or sell. This tells us how to make decisions based on this indicator, even when we use it with other indicators. We mostly use the Stochastic Oscillator on the 15-minute and 60-minute charts to trade currencies.
Traders usually use two stochastic oscillator indicators to predict how prices will change in the future.
The two lines on the Stochastics:
#!% K is the main line, which is usually shown as a solid line.
- Percent D is just an average of the percent K that changes over time. It is usually shown as a dotted line.
When you compare these statistics, you can get a good idea of how quickly prices are changing. Most of the time, the direction of the percent K line will change before the direction of the percent D line. But a slow and steady change is usually shown when the percent D line changes direction before the percent K line. When both percent K and percent D change direction and the faster percent K line then changes direction to retest a crossing of the percent D line but doesn't cross it, this is a good sign that the previous change is stable.
Traders usually use the following two well-known ways to decide whether to buy or sell using the percent K and percent D Stochastics indicators:
In the first method, a percent K signal is crossed with a percent D signal. Analysts say that percent D can act as a line that tells percent K what to do. When percent K goes up through percent D, it's a buy signal. When it goes down through percent D, it's a sell signal. In real trading, however, these crossovers can happen too often. To avoid repeated whipsaws, we can wait for confirmation of a signal, like when a crossover happens at the same time as a pullback from being overbought or oversold, or when the percent D line peaks or troughs. If the price changes a lot, we can instead use the simple moving average of the Stoch percent D indicator to smooth out the price changes.
The second method is to decide whether to buy or sell based on the idea that percent K and percent D change over time. Keep in mind that, in general, levels of percent K or percent D that are above 80 or below 20 can be seen as overbought or oversold. So, if you want a better chance of winning, it's best to time your buying and selling to the return from these thresholds. That means that after a small change, we should buy or sell. Let's say it in a more meaningful way: once the price goes over one of these thresholds, we should wait until prices go back below those thresholds before deciding whether to buy or sell (for example, if the oscillator were to go below 20, we should wait until it rises a little bit above 20 to start buying, if the oscillator were to go above 80, we waits until it falls below 80 to sell).
Use stochastics in market trends
The key is that when the market is going up, we will look for oversold conditions (when the Stochastics fall below the oversold level (below 20) and rise back above the same level) to get ready to trade, and when the market is going down, we will only look for overbought conditions (when the Stochastics rise above the overbought level (above 80) and falls back below the same level).
Use stochastic in a market with no clear trend.
Buy when percent K falls below the oversold level (below 20) and then goes back up above that level.
Sell when the percent K rises above the overbought level (above 80) and then falls back below that level.
Remember that Stochastic would be more accurate if it was used with other signals. Before we can stick to a method, we need to make sure we have a good combination. For example, we need to figure out how to handle our money and test it.
