One of popular technical indicators used by security traders is stochastic oscillator. Having been around since 1950s, stochastic indicator is still widely used, including in forex trading. It is a momentum indicator, which compares a closing price with prices over a certain period. The indicator is used to generate overbought and oversold price ranges.
What Stochastic Indicator Tells the Traders
The stochastic indicator helps the traders in making the right decision based upon the momentum. When the market trend is upward, the price closes near the high. On the other hand, when the market trend is downward, the price closes near the low. The traders prefer the Stochastic as it allows them to make accurate predictions. It helps both beginners and veteran traders to make good decisions of entry and exit points.
The resulting values in stochastic indicator always range from 0 to 100. When the value readings are over 80, they usually indicate overbought range. Meanwhile, value readings under 20 indicate oversold. In cases of very strong trend, the overbought and oversold conditions can last longer. Then, the traders can use them to predict the price shifts in the future.
How What Stochastic Indicator Works
The stochastic indicators works to analyze a price range for a specific period of time, which usually ranges from 5 to 14 days. The indicators are shown in candles. The indicator uses absolute high and absolute low prices for a certain period. Then, it compares the absolute prices to the closing price.
When the signals are kept crossed in one direction, the trend is said to be valid. The trends are strong when the Stochastic indicator is in the oversold or overbought area. However, when the Stochastic suddenly moves into one direction and the bands are widening, a new trend may emerge. This can make decision-making process more challenging.