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Stochastic Oscillator Trading Analysis and Stochastic Oscillator Signals

Developed by George C. Lane

Stochastic Indicator 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. Oscillator uses a scale of 0-100 to draw its values.

How to Place Trading Stochastic Oscillator Indicator on Chart

This Oscillator is based on the theory that in an up trend market the price closes near high of price range and in a downwards trending market the price will close near the low of 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 Trading Oscillators: Fast, Slow and Full Stochastics

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

This oscillator works on the principle that:

  • In an upwards trend, price often tends to close at the high of candlestick.
  • In a downwards trend, price tends to close at the low of candlestick.

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

Trading Analysis and How to Generate Signals

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

XAUUSD Crossover Trade Signals

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

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

50-level Crossover:

Buy signal - when stochastics indicator lines cross above 50 a buy signal gets generated.

Sell signal - when stochastic indicator lines move below 50 a sell signal gets generated.

Divergence XAUUSD Trading

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

This is used to determine potential trend reversal signals.

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

How Do I Analyze Trading Stochastic Oscillator Indicator in Chart?

Gold Trend reversal - identified by a classic bearish divergence

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

Stochastic XAUUSD Indicator - Stochastic Oscillator Indicator Analysis

Gold 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.

Stochastic Indicator - Stochastic Oscillator Indicator Analysis

Overbought - Values Greater 70

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

Stochastic Indicator - Stochastic Oscillator Indicator Analysis

Oversold - Values Less Than 30

Trades are generated when the Stochastic crosses these levels. However, overbought/oversold levels are prone to whip-saws especially when market is trending upward or downward.

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