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How To Read Stochastics Indicator?

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By : Article Distribution    29 or more times read
Submitted 2010-04-08 00:00:00
How many technical indicators you need in making a trading decision? Many traders fall victim to analysis paralysis and use too many indicators. What you need to do is master only these two indicators; The Stochastics and the MACD (Moving Average Convergence Divergence. Both are called oscillators as their values oscillates between two extremes!

Why I say these two indicatos are the best for you. Let me explain. Trending conditions in the market exist not more than 30-40% of the time. Rest of the time, the market is range bound or what you call consolidating. After a nice trending move, the market will move in a consolidation phase.

In choppy range bound market conditions, Stochastics is your best friend. And in a trending market conditions Moving Average Convergence Divergence (MACD) will give you solid trading signals.

Some traders try to overate the MACD. No indicator is the holy grail in trading. Market conditions keep on changing so does people's perceptions on a value of an indicator. Now, stochastics may be more useful as compared to MACD under certain market conditions.

Stochastics is also known as a Momentum Indicator. This is a popular trading tool used to determine whether the market is in an overbought or an oversold condition.

Overbought means that the prices have advanced too far too soon and are due for a downside correction. On the other hand, oversold means that the prices have declined too far too soon and are due for an upside correction.

Stochastics used a mathematical formula that sows the location of the current close as compared to the high/low of the range over a certain period of time. Closing prices near the top of the range show that buying pressure and closing price near the bottom of the range show selling pressure.

Now Stochastics uses two line known as the %K and %D. These two lines are plotted on the chart for a given time period. The %D is the 3 period moving average of the %K line. Now %K is a ratio or percentage and fluctuates between 0 and 100. It is calculated with the formula that used the recent close, highest high and the lowest low.

Now the %K line is the faster line and will change direction as the %D line is just the moving average of the %K line. The general rule is the if the reading is over 80%, the market is overbought and ripe for a downside correction. And if the reading is below 20% on the chart, the market is oversold and ripe for bouncing down.
Author Resource:- Mr. Ahmad Hassam has done Masters from Harvard. Get these Forex Scalping Cheatsheets FREE! Learn this powerful Fibonacci Retracement Method FREE that pulls 500+ pips per trade!
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