The stochastic oscillator can help you to determine when a currency pair is overbought or oversold. Here is How to Use Stochastic Oscillator in Forex?
16 February, AtoZForex – Stochastic is a simple momentum oscillator developed by George C. Lane in the late 1950’s. The oscillator can help you to determine overbought or oversold of the currency pair. Since the traders are using Stochastic over 50 years so it became the mostly use strategy in the Forex market.
How to Use Stochastic Oscillator in Forex
Since there are multiple variations of Stochastic oscillator but we will focus solely on the Slow Stochastic oscillator. Slow stochastic is generally found at the bottom of your chart consists of two moving averages. These moving averages are destined between 0 – 100. The blue line signifies the %K line and the red line signifies the %D line. The %D is an MA of the %K. Momentum changes the directions when these two Stochastic lines cross. Therefore, the trader should check a signal in the direction of the cross when the blue line crosses the red line.
Here I am going to tell you the step-by-step guide for using Stochastic Oscillator in Forex trading. However, traders are always observing for ways to improve signals. There are two ways by which you can filter these trades to advance the strength of the signal.
Crossovers at Extreme Levels
Normally, a trader won’t have any desire to take each signal that shows up. A few signals are more grounded than others. The principal channel we can apply to the oscillator is taking crossovers that happen at extreme levels.
Since the oscillator is bound in the range of 0 and 100, overbought is considered over the 80 level. Then again, oversold is considered underneath the 20 level. Consequently, cross downs that happen over 80 would show a potential moving trend bring down from overbought levels.
Filter Trades on Higher Time Frame in Trend’s Direction
The second channel we can hope to include is a trend channel. On the off chance that we locate an extremely solid uptrend, the Stochastic oscillator is probably going to stay in overbought levels for an amplified timeframe giving numerous false offer signals.
By then, if Stochastic crosses up from oversold levels, then the selling pressure and the momentum is likely lightened. This gives us a signal to buy which is in arrangement with the bigger trend.
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