Lesson #35 Learning Stochastics to Trade Forex

Stochastic Analysis and Stochastic Indicator

An important indicator you can use to determine the end point of a trend is Stochastics. Strictly speaking, Stochastic is a measure of overbought and oversold conditions in the market.

The two stochastic lines have similarities with the market. One line would be faster moving then the other.

Steps to Employ Stochastics Processes

Stochastic measurement is scaled from 0 to 100. Based on this, overbought or oversold conditions can be measured.

When the stochastic line goes above 70, this tells you that the market is overbought. The red line in the chart represents the overbought conditions.

If the stochastic line falls below 30, it indicates that the market is oversold. It is represented by the blue line on the chart.

As a general rule, when the market is oversold, you should buy. On the other hand when the market is overbought, you should always sell.

Chart currently unavailable

The chart is showing that the stochastic indicator is signaling an overbought market condition for a long time already. Based on the chart, will you be able to guess where the price will go next?

You are perfectly correct if you guessed that the price would go down. That is because a reversal will be very imminent due to extended overbought market conditions.

This is essentially how stochastic works. Some traders have different uses for stochastics. However, the essence of stochastics is to simply measure overbought and oversold market conditions.

In due time, you will be able to understand how to use stochastic in your trading transactions.