Stochastics Is A Widely Used Indicator In Forex Trading
Stochastics is one of the most popular indicators in forex trading. You can find it on almost all platforms and charting services. But most traders use them incorrectly. Stochastics is an oscillator that has two components %K and %D. This is the formula to calculate K=100(C-L)(H-L) where C is the Close, H High and L the Low of the period. Typically this period is 14 days. However, 9 days period is also popular. %K is the 3 day MA of K and %D is the 3 day MA of %K.
But you don't need to know all these formulas when you trade with it. 14 days period is the default setting. Some traders prefer to use the 9 days period but you should just stick with the 14 day period.
Stochastics is the measure of the close as related to the high and the low. It calculates the percent distance of the close to the range. It is often used as an overbought and oversold indicator. Typically when it moves above 80, the market is overbought and when it moves below 20, the market is oversold. But, selling when it is above 80 and buying when it is below 20 is a money losing strategy.
This is due to the fact that the overbought and the oversold condition only works during a sideways market or a mildly trending market but it falls apart completely when the market is in a strong trend. Due to this fact, many traders only buy when the stochastics get above 80 and the %K crosses down below the %D and sell when the stochastics get below 20 and the %K crosses above the %D. Whatever, there is a better way to trade using this amazing indicator.
A better method is to trade the %K and %D crossovers. %K is the faster moving line whereas %D is the slower moving line.
When the %K crosses %D when it is still climbing, it is called Left Handed Crossover. The Right Handed Crossover occurs when %K crosses from the right side of the hump of %D. A right handed crossover will only occur when the market stabilizes first and then starts to drop. Many traders consider the right handed crossover as the more accurate signal.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.
by: Ahmad Hassam
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Word Count: 376
Date: Sat, 4 Dec 2010
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