The Slow Stochastic Indicator

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Stochastic Indicator: What Is It And How Do I Use It?

The stochastic indicator is an oscillator that enables you to see at a glance the momentum of the market. Momentum is the pressure or weight behind the current trend. It is based on the idea that while prices are rising, the closing price will tend to be higher than it would be if the market was stable. Equally, when prices are falling, the closing price will tend to be low. From this assumption the oscillator measures when a trend is considered to have reached its limit and is about to turn.

The actual calculations are complex but fortunately you do not need to do them because most trading software will do this automatically for you. This means that you should be able to access the indicator plotted on a chart in your forex brokerage account.

The stochastic indicator will give you two lines that usually run fairly close together:

- the line called %K gives a comparison of the last closing price to previous closing prices.

- the line called %D smooths out the %K line and can be used as a signal line.

So what does the stochastic indicator actually tell you, and how can you use it to make money?

Using it is quite simple. It gives a signal that a market is overbought or oversold. In other words, it will tell you when a trend should be about to reverse, according to the basis of their calculations.

If both lines are high, this is a signal that the market is overbought. If you are trading forex on the basis of this indicator you would put in an order to sell.

Conversely if both lines are low, they are telling you that the market is oversold and you could put in an order to buy.

Keep in mind that you should not trade on the basis of one indicator alone, but always seek confirmation from at least one other.

You will normally have horizontal lines on your charts marking the high and low points for you so that you can see at a glance when to act. In many cases you can alter the position of these lines to suit your trading style. The most common settings are 70, 75 or 80 for the high line and 30, 25 or 20 for the low line.

If your settings are closer (70 and 30) you will want the stochastic lines to stay above or below your trigger lines for a longer time before you trade. If your settings are at 80 and 20, any movement above them would be a strong signal. Check this out with your own backtests to decide when you would be comfortable putting in an order.

Many currency traders also regard the relative positions of the two stochastic indicator lines as a signal for forex trading. They would buy when %K crosses %D line from below going upwards, or from above going downwards.

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Friday, July 3rd, 2009 Strategy No Comments

Fx Technical Analysis: Trading With Charts And Trends

Forex technical analysis is one of two ways to analyze the foreign exchange markets. It works by studying the movement of prices, while the other method, fundamental analysis, looks at external economic factors such as the strength of the national economy, political events and so forth.

Studying price movement with forex technical analysis involves charts. The theory of it is that if you look at the historical records of how prices have moved in the past, you can identify tendencies and trends which will mean that you can predict how the prices will move in the future. Then as soon as you spot an emerging pattern that fits your system, you have a trading opportunity.

There are three types of forex charts:

1. Line charts

Line charts simply plot each closing price and join them with a line. The rise and fall of the line shows the general movement of a currency pair. However, it does not show movements within the trading period, only the close.

2. Bar charts

A bar chart will show a series of vertical lines or bars. The top of the line represents the highest price during that time period. The bottom of the line represents the low. A short horizontal bar on the left side indicates the opening price and a short horizontal bar on the right side indicates the closing price.

Since they show the open, high, low and close, bar charts are also sometimes called OHLC charts.

3. Candlestick charts

Forex candlestick charts show all of the same information as a bar chart, but presented in a different way which most people find easier to read at a glance.

You have the same vertical line with the high at the top and the low at the bottom, but there is also a wide block in the middle showing the gap between the opening and closing price. The blocks will be filled white (for a rising price) and black (for a falling price) or more often these days they are colored. Colors can vary but a common combination is green or blue for rising and red for falling.

Most people prefer candlestick charts over bar charts because they are easier to interpret. It is much easier to see turning points in the market using candlestick charts. You can immediately see where the market reversed from an upward to a downward trend and vice versa.

When you see a trend forming, you can make money by trading in the same direction as the emerging trend. ‘The trend is your friend’, as currency traders say. For this reason, identifying the trend is the most important thing to learn in forex technical analysis and using candlestick charts is probably the easiest way to do this.

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Tuesday, June 23rd, 2009 Strategy, Trading with Charts No Comments