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An In-Depth Overview Of The Stochastic Indicator In Forex Trading

Stochastic indicator is a type of forex trading indicator which helps the forex traders to determine the right time to make an entry or exit from the market. The determination made by the forex trading indicator is based on various aspects. If you consider the stochastic indicator before and during the forex trading then you will be able to make better decisions related to forex trading. It is basically a momentum indicator which compares the closing price and the price range of the security over a certain time period. In short, it measures the momentum of the price. Thus, when it measures the prices are going up, the demand is changed by the traders before the price. Click on https://www.forexreversal.com to know more about this indicator.

Purpose of using stochastic

The common purpose for which you can use the Stochastic are:

  • Intraday trading
  • Divergence
  • Buying and Selling confirmation
  • Scalping
  • Daily swing method with Admiral Pivot

Being the momentum indicator, this indicator can signal the actual movements hence the traders are able to make the right move to make better profits.

Graphical view of the stochastic indicator

The closing price of the security which is high is the uptrend while the closing price which is near the low value is the downtrend. The momentum is slow if the closing price is away from the high or low prices. Stochastic indicator is quite effective in the slow-moving trends. To make use of this indicator, there is a need to have a graph on which two lines are plotted. One is the low oscillating %K while the other is moving average of %K or %D. This indicator can range from 0-100 (by default). In the default setting of the indicator, the slowing is applied as a period of 3.

 The formula used for calculating the values

To know the stochastic divergence, there is a need to simplify the calculations by using a formula. Thus, a formula applied is:

  • %K = 100(C – L14)/ (H14 – L14)
  • C is the current closing price of a security
  • L14 is the lowest price of the 14 previous trading sessions
  • H14 is the highest price traded during the same 14 day period

In this formula, the duration of the trading sessions can vary depending upon the time period you choose for trading or you want to know the divergence.

Read the chart to understand the divergence

The chart prepared is the stochastic indicator. If you know how to read the chart, you will be able to understand the stochastic divergence. Traders are required to read the %K and %D lines. In the graph, “20” is considered as the oversold threshold while “80” is considered as the overbought threshold. The traders should know that they have to sell the securities or stock which they have when the indicators move above “80” levels.

The levels are adjustable to fit the analytics needs. Above “80” readings show that the trading is done at the top of its higher low range. This indicates the uptrend while the readings below “80” have lower high range and it shows the downtrends.