Last Updated on February 8, 2021 by Patrick Mahinge
We Fell in Love With the Stochastic Indicator, We Hope You Also Will
The Stochastics indicator is one of the oldest and time-tested technical analysis indicator. It made its debut in the financial instruments industry in the early 1950’s and has since then become popular with novice as well as professional forex traders.
The biggest advantage of using Stochastics is its simplicity. Traders who have used Stochastics admit that its behavior is very easy to understand. You can easily tell when the prices are going to shoot up or when they are going to plummet.
Here are the key takeaways when using Stochastics as part of your forex trading strategy:
- Slow Stochastics provide a clear indicator of the prevailing market conditions
- Your aim is to enter a trade when the market is in the overbought or oversold conditions only
- Learn how to filter out ‘noisy’ signals so that you enter the market in the direction of the trend
Stochastic oscillator in use. Blue circles show crossovers in overbought and oversold regions.
The Stochastic indicator comes bundled almost into all the major trading platforms including MetaTrader4 from forex brokerage firms such XM, Easy-Forex and HotForex. If you have not downloaded your MT4, click here to download it now, and start practicing trading on a demo account.
How to Use Stochastic Oscillator to Trade Forex in Kenya
If this is the first time you will be using Stochastics, remember to try it first on a demo account before you take it live. I don’t need to remind you that trading in financial instruments constitutes a considerable loss and you could lose all your invested capital.
The Stochastics indicator is among a group of technical indicators that are commonly refered as range indicators. It traces the market range from 0 to 100.
When the prices are below the 20 range, the market is said to be oversold. The oversold range portends a forthcoming downtrend, and this is the right time for you to enter a sell trade.
When the indicator goes past the 80 range, the marker is said to be overbought. When the indicators hit the overbought region, there is a high probability that an uptrend is looming. This is the right time to enter a buy trade.
Although the above is the most common way to use Stochastics, very few traders use this way because of its tendency to create false signals. Instead, traders rely on a confirmation in the form of a crossover.
When the slow stochastic indicator crosses over the fast stochastic indicator, this is a clear sign that the market is changing momentum. It is time to enter your trade. However, remember that you should only enter trades when the crossover happens in the overbought or oversold regions.