Effective Ways to Use the Stochastic Indicator

What is the Stochastic indicator?

Another tool used to identify the reversal of a trend is the Stochastic oscillator.

The Stochastic indicator assumes that prices are above or equal to the previous closing price in an upward trend.

In a downward trend, the prices are equal or below the previous closing price.

using stochastic indicator in Forex trading

A stochastic indicator has two lines, one being faster than the other, like in the MACD indicator.

It also indicates overbought and oversold orders in the Forex market.

How to use the Stochastic indicator in Forex trading

The Stochastic indicator is measured on a scale of 0-100.

In the figure below, the red dots indicate the region of overbought trades (above 80), while the blue dots represent the region of oversold trades (below 20).

overbought stochastic indicator

When the Stochastic indicator reads above 80 (red dots) on the scale, the market is considered to be overbought.

On the other hand, the market is oversold when the stochastic lines are below 20 (blue)

How to trade Forex using the stochastic indicator

Basically, you will buy the currency if the market is oversold, and sell when the market is overbought.

However, sometimes the prices might stay up in the overbought or oversold region for long, so you need to be careful when trading Forex with the Stochastic indicator.

Read Also: How to Use Keltner Channels in Forex Trading

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