Stochastic indicators.
Another type of forex chart analyzing tools that is used by traders all around the world. It is an extremely useful tool for understanding where the trend might be ending and where we need to pull out of it.
Stochastic indicators were first introduced by George Lane on the late 1950. And that is what he had to say about his invention: Stochastics measures the momentum of price. If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price.
Essentially stochastic indicators have a lot in common with the MACD indicators that we have talked about earlier. Well. At least their form of representation in the charts is the same. Stochastic indicators are also represented in the form of two lines, one of which is faster than the other.
The lines are scaled from 0 to 100 and they can tell traders when the market is oversold and/or overbought.
And I am going to make a little pause right here and remind you that when the market is oversold we need to BUY and when the market is overbought we need to SELL the assets.
That being said, it goes like this with stochastic indicators: when the stochastic lines are higher than 80 on their scale, that means that the market is overbought and you are to sell your assets. When the lines are below 20 that means right the opposite – the market is oversold and we need to BUY ASAP!
And I am going to make a little pause right here and remind you that when the market is oversold we need to BUY and when the market is overbought we need to SELL the assets.
Sometimes the following happens: we see stochastic indicators in the overbought positions. But the markets are just standing at that level and nothing really happens. That means either that traders can’t really make up their minds or that there is another indicator that shows that the market is going to move in another direction. In this case we need to look at all of the indicators and tools in our disposal in order to understand the future trends.
Stochastic indicators are not that difficult. Higher-lower – pretty much like everything in the forex markets.
Stochastic lines are pretty basic and that allows them to be used by traders in a number of ways, although their main purpose is to display the end and beginning of the new trends by indicating overselling and overbuying of the markets.
