How to use Stochastic Oscillator in currency trading
Forex is the largest currency trading market and is widely traded by Banks, government and large financial company. The major currencies are United State Dollar, Europe Euro, Great Britain Pound and Swiss Franc. There are basically 2 type of trading, fundamental and technical trading. For technical trading, commonly using indicator using Moving average, High and Lows and Stochastic Oscillator.
This is the duration of the number of periods to calculate to gauge the momentum of the price movement. Default setting is 14 periods. And the formula is to take current close minus lowest low through out the 14 periods, divide by highest high difference lowest low and multiply by 100. This in a way uses the highest resistance and lowest support, using current close price to gauge the level of momentum in percentage of the larges difference between the resistance and support.
This is the simple moving average line that is plotted alongside %K and act as a signal trigger line. This is default 3 days, which show the fast movement of the price signal within the last 3 periods. This in turn complete with the slow %K which show momentum over longer 14 periods.
Over brought or Over sold
The stochastic oscillator as express in 100 has 2 level of indicator at 20 and 80 which show significant over brought and over sold situation. At levels more then 80, the currency is showing a trend of price near the resistance level and with %D changing or cross the %K line and went downwards, show a sign of currency moving from over brought to trending down. This crossing act as a trigger to enter a Sell trade on prediction that the currency to go downwards. Similar to level below 20, the situation is over sold, witch %D crossing %K, the prediction is the currency to go upwards thus triggering a Buy trade.
Midway 50 level
The 50 level also mark the trending half way point or beginning of a currency trend. If the direction of %D and %K points in the same direction and both cross the 50 level markings, prediction are set for the currency to continue in the trend, thus triggering a Buy/Sell trade respectively. This is particularly useful when the currency has been over brought or over sold for a relative period of time and it show sign of weakening trend or strong momentum against opposite flow.
Slope of %D and %K
The slope of %D and %K can be visually or calculated using gradient. The slope of %D against $K at convergent indicate the trend is growing strong. The slope at parallel means the trend is steady. And the slope of %D and %K at divergent indicate trend is weakening. Many traders did not realize this, but if you observe the change slope of this 2, you can find highly reliable triggers to buy or sell trades when trending or currency is going sideways.
In addition, you can use stochastic with visual support and resistance indicator at larger timeframe. If you using 15 minutes chart, try visually check the 1hour chart and you may find some trend following or reversal at support and resistance level. This will increase your success in Forex Trading significantly.
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