Traders tend to use many indicators without researching or knowing what they are and how are they calculated. You can oscillator stochastic forex trading stochastics oscillator to measure the speed and momentum of a price over a time period.
A low value point to the strong uptrend as much as it points to a strong downtrend. A high value points to the strong downtrend as much as it points to a strong uptrend. Stochastic oscillator works best when used with leading indicators, chart patterns, and volume and price movement. A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time. It is one of the earliest technical oscillators in securities trading used to predict future market direction.
Oscillator’ refers to repetitive variations up or down the equilibrium position. K tracks the most recent market rate for the currency pair. It is important to grasp this concept right from the beginning. Once you understand, you will position yourself way ahead of other traders out there. All indicators built into a trading platform are being computed based on price data fed into that platform. If price isn’t recorded in the trading software, the indicators cannot be populated. All indicators are a different versions of the same data source.
Equation and time sets might change but the core of all of the is the same. And open the core files of any lagging indicator you wish. After inspecting the code, you will realize they are all using difference equations but the same core data. None of lagging indicators you are currently using are capable of predicting future price.
Price is influenced by external factors, not the indicators. Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy. There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. First off, there is a wrong belief that stochastic can point to overbought or oversold levels. A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal. There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below 20. You will now see the price action unfolding on the screen together with the indicator of your choice.
It doesn’t take long to see that Stochastic Oscillator does what we expect it to do only half the time! As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly. Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal. When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis. Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks.
Buying would not be a great idea! Traders use indicators for technical analysis in order to gain useful additional information. Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy. Look at it this way: by using a single indicator in isolation, you’re basing your entire strategy on just that and nothing else. To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements.