Forex - Indicators - Stochastic

Stochastic is designating a process having an infinite progression of jointly distributed random variables.

The Stochastic Oscillator Technical Indicator compares where a security’s price closed relative to its price range over a given time period.

The Stochastic Oscillator is displayed as two lines.

The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.

There are several ways to interpret a Stochastic Oscillator. Three popular methods include:

Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level.
Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level.

Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.
Look for divergences. For example, where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs.

How to use

This is confirmation indicator and acts as a filter, or confirmation for some other signal, and filter to filter false signals.

NOTE: The main signals (from some other indicators) may not come in simultaneously with the Stochastic.

For this reason, it is important to check different possible signals from the Stochastic indicator to use it for trading, such as
- Fast Stochastic: 34/5/5
- Medium Stochastic: 55/8/8
- Slow Stochastic: 100/8/8

Thus, the most usual rules/signals (most usually used) for this indicator are the following:

main line of indicator is above or below some level indicating overbought/oversold.

The main line is above some level (50%, 70% or 80%):

as a confirmation for sell trade - for trend following system
as a confirmation for buy trade - for breakout systems (breaking support/resistance levels)

The main line is below some level (50%, 30% or 20%):

as a confirmation for buy trade - for trend following system
as a confirmation for sell trade - for breakout systems (breaking support/resistance levels)