Forex Indicator: Using Stochastics in Forex

At first glance, stochastics seem like a complicated forex indicator. But when broken down, they offer a solid tool for Forex investors. The market fluctuates during any given period, and you can measure the velocity or momentum of a trend with this forex indicator.

Stochastics works on the premise that while prices are rising, closing prices will probably be higher than during periods when the market is flat. Likewise, when prices fall, closing prices will probably be lower than they would be otherwise. With a stochastic indicator, you can measure when trends are about to reverse.

You can easily find trading software programs that will develop stochastics as forex indicators. It is also likely that your Forex trading account will provide access to these indicator charts. Knowing how to read them is the next step.

You will notice two lines on the stochastic indicator: the %K and %D. %K compares the most current closing price to prior closing prices, while %D is a signal line.

What does this all mean? How can it help you time trades and maximize profits?

In essence, the stochastics forex indicator tells you when the market is overbought (prices too high for real value) or oversold (prices too low for real value). This helps you predict when trends will reverse so you can make trades based on that knowledge.

When both %K and %D lines are high, it indicates the market is overbought. According to this strategy, it would be a good time to sell before prices correct themselves.

It works in the opposite way when both %D and %K lines are low. This indicates an oversold market, meaning it is a good time to buy before prices climb.

The stochastic indicator is but one strategy available, and by itself, it cannot predict the market fully. It is a good idea to use other indicators to confirm market trends before trading.

This forex indicator is extremely helpful, though, because it is easy and quick to read. You will see a chart with horizontal lines along a 1 to 100 scale. These mark highs and lows and can help you determine if a market is overbought or oversold. Most traders use settings of 70, 75, or 80 on the high side, and 30, 25, or 20 on the low side. When prices rise above or fall below these lines, it triggers a trade.

Depending on the settings or trigger lines you choose, you will either trade immediately when values rise or fall or wait longer. For instance, if your settings are 80 and 20, price fluctuations are stronger signals that you should trade immediately. With settings of 70 and 30, though, price fluctuations are normal, and you may want to wait until you have a stronger indication. Practice with a demo account first.

Some investors also use the positions of %K and %D in relation to each other to determine when to trade. When %K crosses %D from below while ascending or from above while descending, many take this as a forex indicator signal to buy.

Want to learn more? Here are some top forex training resources:

1. Forex Trading Made EZ (Easy)

2. Forex Mentor by Peter Bain

3. Forex Profit Accelerator by Bill Poulos