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Forex Trading Stochastic Oscillator Indicator

The Forex trading stochastic indicator is an indicator that follows the momentum of the market. The stochastic indicator is based on a simple idea. During an uptrend, closing price tend to be high, while during downtrends prices close low.

The Forex trading stochastic indicator warns about the presumed future direction of the Forex trading currency price, based on the assumption the when the currency price rises is closes near the high and when it drops it closes near lows. This way the stochastic oscillator helps analyze a certain trading pattern, whether it is an uptrend or a downtrend.

Using stochastic indicators does not require advanced calculations in most Forex trading sites, since these are included and are done automatically in the Forex Trading Software Online. The current closing price for the stochastic indicator is shown in relation the previous prices over a period of time.

This indicator has two lines:

  • %K compares the current Forex trading closing price to the previous trading range.
  • %D is a smoothing of %K that is seen as a signal line.

When the stochastic line is above 80%, an overbought signal is given, and when it drops below 20%, the oversold signal is given. This explanation tells you when to buy and sell using Forex trading stochastic indicator:

  • Buy when the indicator falls below the line, and when it crosses the bottom level up.
  • Sell when the indicator rises above the line, and crosses the top level downwards.
  • Buy when the %K line crosses the %D line from below upwards, or from top downwards.

Basically, the Forex trading stochastic indicator currency's closing price to its price range over a given time period. The sensitivity of the indicator can be lowered by adjusting the time period or by using a moving average of the result.

Sam Davis - Executive Editor

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