When a trader starts to download a trading application to enhance his forex trading potentials, it is expected that these applications will suggest several indicators which are regarded as powerful tools to help them create a better trading plan. One among the many indicators is the Stochastic Oscillator. Today, we shall update your knowledge by introducing basic notes about Stochastic Oscillator and its purpose in the trade.
The Stochastic Oscillator
This useful tool was devised by George C. Lane during the 50s. Despite being vintage, the Stochastic Oscillator is still valued by traders and analysts because of its effectiveness when predicting potential reversals. In particular, such an indicator has the ability to measure momentum via the comparison of closing price versus the trading range at a specific period of time.
3 Useful Stochastic Oscillator Notes for Better Trading
1. Calculating Stochastic Oscillator
Figuresforsuch this indicator can help a trader to determine the consistency with which price closes near its recent high or low. In order to do this, you have to subtract the low for the period from the present closing rate then divide it by the total range for your desired time frame before multiplying the result by 100.
2. Stochastic Oscillator range
Results or ranges that are given by this indicator always range from 0 to 100. Thus, experts can attest that these figures are great instruments to determine if an asset is oversold or undersold. In particular, figures that are over 80 are regarded as overbought while readings that are lower than 20 are oversold.
3. The two lines of Stochastic Oscillator
These two lines represent the rates of the assets. The first line denotes the actual oscillator rate in every session while the other shows its three-day simple moving average. As a trader, it is a must to remember that the trend for the rates of each asset is expected to follow momentum, if the two oscillator lines cross each other, experts interpret this as a sign of reversal since it is a proof that the momentum is having a big shift every single day.
With the given reality that this age long indicator is a suitable tool in determining trend reversal, experts can attest that this could be one of the most effective elements to create better strategies and plans as it provides a definite entry and exit signal when paired with other trading techniques such as candle stick. Financial experts also remind traders who wish to use Stochastic Oscillator in their Forex Trading journey to find a currency pair that demonstrates a vivid and long bullish trend. Bear in mind that an overbought currency pair is not a bad thing. In fact, if the currency pair stays in the overbought zone for a long time, it is a sign that the rate is about to reach the previous area of resistance. Thus, it is a potential currency pair but you have to be careful with your interpretations too because momentum oscillators are also believed to depict false signals most of the time.