Stochastic Indicator Overbought & Oversold Levels

Stochastic indicator is used to look for overbought/oversold signals. Overbought levels are above 80% level and oversold levels are below 20% level.

Key is to not only look at Stochastic indicator when the %K or %D lines touch or cross overbought/oversold, but also when they cross over & back through these levels.

Just as with other forex momentum indicators such as RSI indicator the Stochastic indicator can stay inside the overbought & oversold levels for some time. When this forex stochastic indicator stays within these levels for a long time it indicates strong upward trend (overbought) or strong downward trend (oversold).

When the stochastic lines cross back below or above these overbought and oversold levels it is usually a good indication of an upcoming trend reversal.

A trader can look for further signals to make the oversold or overbought levels more reliable if:

Buy Forex Signal Using Stochastic Oscillator Oversold Levels

• Before Buying, the %K and %D lines turn upwards from below 5%.
• A reading that is floating near 5% means that forex bears are in control and there is selling of the currency pair. A trader should wait for the Stochastic Oscillator to move back above 5% as a sign that the selling pressure is easing.

The Buy signal is confirmed when the stochastic indicator moves above oversold, then after a while returns to oversold but this time moves up immediately without staying at the overbought.

Buy Forex Signal Using Stochastic Oscillator Oversold Levels

Sell Forex Signal Using Stochastic Oscillator Overbought Levels

• Before Selling, the %K & %D lines turn down from above 95%.
• A reading that is floating above 95% means that forex bulls are in control and there is buying of the currency pair. A trader should wait for the Stochastic to move below 95% as a sign that the buying pressure is easing.
• The sell signal is confirmed when the stochastic moves below overbought, then after a while returns to overbought but this times moves downward immediately without staying at the overbought.

Sell Forex Signal Using Stochastic Oscillator Overbought Levels

Looking at different chart time frames when using oversold and overbought levels can also help to determine the correct entry strategy when opening a trade.

The main theory is to trade with the market trend. Always double check the signals with the longer term stochastic indicators to confirm signals on the shorter chart time frame periods.