Stochastic in technical analysis
Stochastic has long been used in technical analysis. It is an old but reliable technical indicator. Forex gives much information and is very useful in formulating a forex strategy.
The starting point of this indicator is that the closing price for each period in an uptrend is in the vicinity of the high price because the bulls continue to increase, while the opposite occurs in a downtrend (the bears continue to sell). This is both simple and logical. The formula uses the Stochastic indicator then shows how far the uptrend is likely underway.
Stochastic is a Range Trading Tool:
Stochastic is an excellent range trading tool. As written earlier move Forex prices are 70 to 80% of the time in a range bound confirmation. In slow pace, they up and down, without the need for too much is done. For the real trend trader, these are not the most exciting moments, but for those who are able to make use of it can be a goldmine. The major advantage of range trading is that the certainty of direction is quite large. You can stop / losses are reasonably tight turn while the probability of success is high.
50 euro free markets
If the price moves in a range of only 25 pips, but you 80% of the time on the correct position so that means that you (with stops at 25 pips) 200 pips and earn 50 pips but loses. Trek still 10x2 pips for the spread off (10 trades) and you're talking about a net profit of 130 pips or 13 pips per trade. Admittedly, it's not sexy, but it does have teeth. Smile
Okay, so Stochastic can help determine where exactly in the range is. As with all technical indicators you should never blindly trust the tool but rather as a guide.
Stochastic explained
The basis of Stochastic is to measure the level of a moving average of (usually) 14 periods. There is a fast stochastics and slow stochastics.
Stochastic the fast measurement of the rate with respect to the moving average period 14, and displays it on a scale of 1 to 100.
The slow stochastics, the 3 period average of the fast stochastics. This filters out the noise so more out of the market; disadvantage is that he was therefore more exhibits.
Stochastic thus moves on a scale of 1 to 100. This simply means that the stochastics figure shows that the price is in comparison to the period 14 moving average. Is the number 50, then the price is thus located exactly in the middle of the period 14 moving average.
The default rule is that if the stochastics 80 or more shows, the price is in a overbought stage (decrease is close to) when the price is in a oversold stage (increase is close to) when the measurement is 20 or lower. This does not mean you should immediately go short when the measurement is 80 or more and lung when he was 20 or less. A measurement of 80 or more (or less than 20) may continue for days. The idea is that you have the correct indicator is watching and waiting until he 80 or 20 line breaks again, indicating a turning point.
Stochastic is essentially what a momentum meter is called when used correctly (see above) you can see when the break was used and the trend the other direction. (Another momentum meter is the Commodity Channel Index, or CCI, which in a later section covers).
Stochastic is at its best: Divergence
One of the most useful ways to stochastics use is at an overbought / oversold (80/20) position to observe when the prices were higher highs / lower lows while keeping the Stochastic already in descending mode, but not yet again by the 80/20 line is shot (if there is divergence-deviant behavior-between price movement and stochastics is). This fact indicates that so-called trend is near exhaustion, with this method you do not suffer lag of the indicator, because the already falling / rising indicator predicts that the era of the trend may soon over.
Again, 100% certainty, no technical indicator (also no fundamental way). The trick is to search for low-risk probabilities that ensure that your chance of loss is relatively small while the probability of winning is relatively large. If you obey you in the long run (much) to make money, instead of losses. We come back later expanded on the phenomenon of low-risk probabilities in the forex strategy articles.
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