Trade Gold Trading

Stochastic Oscillator Forex Analysis and Stochastic Oscillator Signals

Created by George C. Lane

The Stochastic Oscillator is a momentum indicator - it shows the relation between the current closing price relative to the high & low range over a given number of n periods. The Oscillator uses a scale of 0-100 to plot its values.

This Oscillator is based on the theory that in an uptrend market the price closes near the high of the price range and in a downward trending market the price will close near the low of the price range.

The Stochastic Lines are drawn as 2 lines - % K and %D.

• Fast line %K is the main
• Slow line %D is the signal

3 Types of Stochastics Oscillators: Fast, Slow and Full Stochastics

There are Three types are: fast, slow and full Stochastic. The 3 indicators look at a given chart period for examples the 14-day period, and measures how the price of today's close compares to the high/low range of the time period that is being used to calculate the stochastic.

This oscillator works on the principle that:

• In an uptrend, price tends to close at the high of the candlestick.
• In a downtrend, price tends to close at the low of the candlestick.

This indicator shows the momentum of the Forex trends, and identifies the times when a market is overbought or oversold.

Trading Analysis and Generating Signals

Most common techniques used for analysis of Stochastic Oscillators to generate signals are cross overs signals, divergence signals & overbought oversold levels. The following are the techniques used for generating signals

Forex Crossover Signals

Buy signal - %K line crosses above %D line (both lines heading up)

Sell signal - %K line crosses below the %D line (both lines heading down)

50-level Crossover:

Buy signal - when stochastic lines cross above 50 a buy signal is generated.

Sell signal - when stochastic lines cross below 50 a sell signal is generated.

Trade Divergence Trading

Stochastic is also used to look for divergences between this indicator and the price.

This is used to determine potential Forex trend reversal signals.

Upward/rising trend reversal- identified by a classic bearish divergence

Trend reversal - identified by a classic bearish divergence

Downwards/descending trend reversal- identified by a classic bullish divergence

Trend reversal - identified by a classic bullish divergence

Overbought/Oversold Levels on Indicator

Stochastic is mainly used to identify potential overbought & oversold conditions in price movements.

• Overbought values greater than 70 level - A sell signal forms when the oscillator rises above 70% and then falls below this level.

Overbought - Values Greater 70

• Oversold values less than 30 level - a buy signal is generated when oscillator goes below 30% and then rises above this level.

Oversold - Values Less Than 30

Trades are generated when Stochastic Oscillator crosses these levels. However, overbought/oversold levels are prone to whipsaws especially when the market is trending upward or downwards.