slowandfast

Forex Stochastic Indicator Tutorial

In this post today, I am going to share with you how I use the forex stochastic indicator in my trading so that you can also try them out on your trading strategy as well. First of all, let us go through what exactly is stochastic indicator. Basically this indicator consists of 2 lines that […]

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    In this post today, I am going to share with you how I use the forex stochastic indicator in my trading so that you can also try them out on your trading strategy as well.

    First of all, let us go through what exactly is stochastic indicator. Basically this indicator consists of 2 lines that will constant cross over one another.

    There are 2 different settings for this indicator, Slow (5,3,3) and fast (5,5) setting. Take a look at the picture below and you will be able to tell the difference in these 2 indicators.

    slowandfast

    The fast stochastic indicator are more wavy and therefore are more prone to false alarm in trading. Therefore I usually use the slow setting for my trading.

    Below is how I use the stochastic indicator in my trading

    Overbought/Oversold – When the 2 lines of this indicator moves below the 20 level, it is a sign that the market is oversold. Therefore it is also telling us that the market might be making some upward movement soon.

    The upward movement does not means a change of trend but it can be a movement that ranges from 15 to 50 pips. Therefore as a trader, I will be waiting for the chance to get into a BUY trade.

    Similarly, when the 2 lines of this indicator moves above the 80 level, it is a sign of overbought. Therefore it is a sign that the market is going to move down. I will look for opportunity to go SHORT for this trade.

    example

    Strength of Market - Although there is a high chance that the price will move down when the indicator shows sign of overbought, there are also times where the 2 lines remain above the 80 level for a long period of time.

    Whenever you see this scenario, it is a sign that the upward strength is very strong. For those of you who are trend trading, you can then enter a trade in the direction of this strong trend.

    The stochastic indicator is one great tool to use and I hope that you can try out what I teach you here on a demo account. If it is useful for you, you can consider adding it into your trading strategy.

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