Forex Factory is for professional foreign-exchange traders. Its mission is to keep traders connected to the markets, and to each other, in ways that positively influence their trading results. The Stochastic oscillator is another forex chart analysis indicator that helps us determine where a trend might be ending. This simple momentum oscillator was created by George Lane in the late s. Stochastics measures the momentum of price. If you visualize a rocket going up in the air.
This indicator measures momentum by comparing closing price to the trading range over a given period. The charted stochastic oscillator actually consists of two lines: When these two lines intersect, it signals that a trend shift may be approaching. In a chart displaying a pronounced bullish trend, for example, a downward cross through the signal line indicates that the most recent closing price is closer to the lowest low of the look-back period than it has been in the previous three sessions.
After sustained upward price action, a sudden drop to the lower end of the trading range may signify that bulls are losing steam. Ranging from 0 to , the stochastic oscillator reflects overbought conditions with readings over 80 and oversold conditions with readings under Crossovers that occur in these outer ranges are considered particularly strong signals.
Many traders ignore crossover signals that do not occur at these extremes. When creating trade strategy based on the stochastic oscillator in the forex market, look for a currency pair that displays a pronounced and lengthy bullish trend.
The ideal currency pair has already spent some time in overbought territory, with price nearing a previous area of resistance. Look for waning volume as an additional indicator of bullish exhaustion. Once the stochastic oscillator crosses down through the signal line, watch for price to follow suit.
Though these combined signals are a strong indicator of impending reversal, wait for price to confirm the downturn before entry — momentum oscillators are known to throw false signals from time to time. Combining this setup with candlestick charting techniques can further enhance your strategy and provide clear entry and exit signals. If the trend continues, prices are expected to make higher highs. Once market direction is identified, we can then use an indicator to enter into the market.
Since we are only looking to buy in an uptrend, it is important to identify areas where the market is oversold. The Stochastics indicator marks this with the 20 level running horizontally along the indicator. Below you will find several sample entries using Stochastics.
The arrows below price have been included on the chart to better understand where execution may occur. Now that a trade has been opened, traders need to have a plan to exit the market. This is the final step in developing a successful strategy! However, if you are already using the Stochastics Oscillator for entries, you can also use it to plan your market exit. If we are buying on a return to bullish momentum, traders should conclude buying when momentum subsides. The green arrows below have identified where our sample trades would be closed using this technique.
Regardless of the methodology chosen, it is always important to have a plan to exit the market. Once you have this final component in place, you then proceed to test your strategy live in the Forex market. Been trading FX but wanting to learn more? Been trading other markets, but not sure where to start you forex analysis? Register and take this Trader Quiz where upon completion you will be provided with a curriculum of resources geared towards your learning experience.
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Results achieved on the demo account are hypothetical and no representation is made that any account will or is likely to achieve actual profits or losses similar to those achieved in the demo account. Conditions in the demo account cannot always reasonably reflect all of the market conditions that may affect pricing and execution in a live trading environment. A Simple Stochastics Strategy.
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This is the final step in developing a successful strategy! Fast Stochastics vs Slow Stochastics 46 of
For example, once in trade traders may also try applying Fibonacci studying to the most recent swings. Live, interactive sessions Develop your trading knowledge with our expert-led webinars and in-person seminars on a huge range of topics.