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Stochastic Oscillator


The Stochastics oscillator, a popular and dynamic indicator developed by Dr. George Lane, is based on the premise that during an upward trading Forex market, Forex prices tend to close near their high and during a downward trading market, Forex prices tend to close near their low.

 

Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and %D. The range of the Stochastics is between 0 and 100. With a price range of ten to twenty, ten would be given a 0 designation, fifteen would be at 50, and a price of twenty would be at the 100th percentile. The values of the stochastics calculations are dependent on the parameters given to %K and %D.

 

Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish.

 

A Forex Market Price can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20.


How to Use?

 

When the faster %K line crosses above the slower %D line and the lines are below 20, a Forex buy signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a Forex sell signal is generated.

 

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Click here for the Next Article: Relative Strength Indicator (RSI)

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Forex Indicators

Average Directional Movement Index

Moving Average Convergence/Divergence (MACD)

Stochastic Oscillator

Relative Strength Indicator (RSI)

Moving Average

Bollinger Bands

Fibonacci Indicator

 

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