How Will Stochastic Indicator Help You In Forex Trading?

The forex market is the largest financial market and has a huge trading volume. It remains open 24 hours a day. It means at any point of time one business center remains open. It also offers ample opportunity to earn profits. However, this is attained only if you have sound knowledge of forex trading. And this is made possible by several technical indicators that predict market movements or indicate how the currencies will behave during a trade.

Stochastic indicator is one such technical indicator that can help you in earning profits. You need to have thorough understanding of technical indicator you are using. Stochastic indicator works on the concept that when prices are showing an upward trend, it has been observed that the closing prices are likely to be higher as compared to prices at a period when the market is referred to as flat and vice versa. The stochastic indicator helps you in finding out the momentum of a particular trend at any given trading time.

Stochastic indicator helps you in assessing the point at which the market will show a reversing trend. The stochastic indicator was founded by George Lane during late 1950s. It comprises of 2 lines that are referred to as –

%K: This appears as a solid line and more sensitive of the 2 lines. This is usually the main line. %D: This line is the “moving average” of %K. It appears as a dotted line

The stochastic indicator lines are in the range of 1 to 100. With the help of %K, you will be able to compare the current closing price with that of the previous closing prices.

It serves as an important technical indicator to find out whether the market is Overbought or Oversold.

When do we know if the market is Oversold/Overbought?

Overbought means that the prices are higher for real value and when we say the market is oversold, it implies that the market is oversold or prices are lower for real value. It helps you to choose the correct time for trading.

When the market is overbought the D lines are high. This indicates that the time is ripe for selling before the prices regain their “corrected values”. On the other hand, market is said to be oversold when the 2 lines are low. This is the appropriate time to buy.

In majority of the cases, forex traders use settings of 80, 75 and 70 to represent the higher side and settings of 20, 25 and 30 to indicate the lower limit.

Some of the other technical indicators that help you in predicting movement of currency pairs include the following –

• Bollinger Bands
• Elliot Wave theory
• Fibonacci Ratios etc