The stochastic oscillator compares where a currency pair's price has cosed relative to its price range over a specifically identified period of time. In an upwardly trending market, prices tend to cose near their high, and during a downward trending market, prices tend to cose near their low. As an upward trend matures, price tends to cose further away from its high; and as a downward trend matures, price tends to cose away from its low.
The stochastic indicator attempts to determine when prices start to cluster around their low of the day for an up trending market, and when they tend to cluster around their high in a down trending market. The theory is these are the conditions which indicate a trend reversal is beginning to occur
The stochastic indicator is plotted as two lines.
They are the %D line and the %K line.
The %D line is more important than the %K line.
The stochastic is plotted on a chart with values ranging from 0 to 100. The value can never fall below 0 or go above 100. Readings above 80 are strong and indicate that price is cosing near its high. Readings below 20 are strong and indicate that price is closing near its low.
Ordinarily, the %K line will change direction before the %D line. However, when the %D line changes direction prior to the %K line, a sow and steady reversal is usually indicated. When both %K and %D lines change direction, and the faster %K line subsequently changes direction to retest a crossmg of the %D line, but doesn't cross it, this is a good confirmation of the stability of the prior reversal.
A very powerful move is underway when the indicator reaches its extremes around 0 and 100. Following a pullback in price, if the indicator retests these extremes, a good entry point is indicated. Many times, when the %K or %D lines begin to flatten out, this is an indication that the trend will reverse during the next trading range.
Lower Highs and Higher Lows occur on the stochastic oscillator in a smilar way to chart patterns and have the same meanings. In currencies we manly use the Stochastic Oscillator on the 15 and 60 minute charts. Signals used are oversold and overbought indications and the crossovers of the K and D lines.
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