Winning Trades with the Stochastic Indicator
If you have never traded forex before, then there are many different things that you need to know in order to be successful. One of the most important things that you need to know in order to be successful in the world of forex trading is how to use a variety of trading indicators. The specific trading indicator that we are here to talk about today is the stochastic indicator.
This is absolutely one of the best indicators out there, especially in terms of ease of use. The Stochastic indicator is one that can be used in a variety of ways, and moreover it’s quite easy to use to make profits on a daily basis. For those of you who don’t know, this may also be referred to as the stochastic oscillator, which is because the values range or oscillate from 0 to 100. Anyway, this is something that we will explain in further detail below.
Today, we want to take a closer look at the specific video that Andrew has uploaded on Andrew’s Trading Channel. For those of you don’t know, Andrew is a longtime trader who has seen great success in the world of forex trading. Andrew has been creating trading guides and tutorials for almost a decade now, and people have come to rely on him for important tips and tricks on how to trade forex the right way. Today’s particular video focuses on the stochastic oscillator, how it works, and how to use it the right way.
What is the Stochastic Indicator?
One of the most important things that you need to know about the stochastic indicator is that it is this specific type of momentum indicator. To put it in simplest terms, this means that this is an indicator that can provide you with valuable information about the strength of a trend. Keep in mind, this is an indicator that was first created by a man named George Lane in the early 1950s.
Now, if we are going to get very technical about it, this is an indicator that measures the relationship between the closing price of an asset and its price range over a very specific period of time. What is also important to know is that to this day, this is absolutely one of the most important and popular momentum indicators that is in use. Just some of the reasons as to why this stochastic indicator is so popular is because, for one, it is extremely user friendly. It’s very easy to read and newbies can easily use it.
What also stands out about this particular indicator is that it is extremely accurate in terms of telling you whether you should place a buy trade or a sell trade. As you can see, to a certain extent, this is also a trend indicator. The fact of the matter is that if there in indicator tells you how strong a trend is, then in a certain way, it also tells you that there is a trend going on in the first place.
What does the Stochastic Oscillator Tell You?
What we want to do now is to provide you with some more in depth information on exactly how the stochastic indicator works and what it tells you. perhaps one of the most important things that you need to know about this indicator is that it is a range bound indicator. In other words, the value that it will provide you with is always going to be between 0 and 100.
In terms of the information that this can provide you with, one of the things that this stochastic indicator does is tell you whether a security is overbought or oversold. For instance, if this indicator provides you with a reading of 80 or higher, it generally indicates that the security is overbought.
On the other hand, if this indicator provides you with a value that is at 20 or lower, then it indicates that the security is oversold. Do keep in mind that while this is a good indication of the momentum of a specific trend, it’s not always 100% for sure. Keep in mind that securities at times can remain either oversold or overbought, while also continuing with the same trend.
Something else that stands out about the stochastic indicator is the fact that it’s much easier to see hidden divergences with it than with most other indicators out there. The other important thing that we want to note about the stochastic oscillator is the fact that charting it usually consists of the two lines. One of the two lines is the real time value of the oscillator, with the second line representing a three day simple moving average. what you need to know here, perhaps the most important thing of all, is that when both of these lines cross, it shows that there is quite likely a trend reversal coming in the near future.
The Stochastic oscillator does have a couple of drawbacks that you should know about. One of these drawbacks is that it can at times produce false signals. There is a rental on the horizon, when this is actually not the case, and this can lead to a losing trade. If a market is extremely volatile, unfortunately, the chances of this occurring are pretty high.
However, one thing that you can do in order to combat this issue is to use price trend as a filter. What this means is that if the stochastic indicator signals go in the same direction as a trend signal, then it is usually a safe trade to make. Also keep in mind that this isn’t the best indicator to use if the market is trending sideways.
Tips for Success
We want to finish off the day by providing you with some very important tips on exactly how to use this stochastic indicator.
- When using this specific indicator, what you always need to do is use lower settings. The lower the settings that you used, the more signals you will be provided with.
- It is also important that you use the proper settings with this indicator. Generally speaking, the best values to use here are 14, 3, and 3.
- The other important thing to note when using the stop plastic indicator is that if the market is in a strong trend, then you absolutely want to use a pattern trading strategy for the best chances of success.
The Stochastic Indicator – The Bottom Line
We definitely recommend checking out Andrew’s video on the Stochastic oscillator, as it will help you understand all of this in much greater detail.
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