3 Ways to use Stochastics for Forex Trading
Stochastics, like MACD, are also momentum oscillators, reflecting the strength of market movement, which is helpful for online forex trading. Stochastics are one of the most important technical indicators for online forex trading.
Three fundamental ways to use stochastics for FOREX trading Online:
1. Compare the movement of the stochastics to the movement of forex trading prices. If forex trading prices are making new highs (solidly trending upward) or lows (solidly trending downward) and your stochastics are also making new highs (trending upward) or lows (trending downward) then the market trend will most likely continue.
Key Point: if prices and stochastics are in agreement, then currencies are being traded at what the market deems a fair value, and there is no immediate reason to believe that the market will change course.
If, however, prices are making higher highs (trending upwards) while your stochastics are making lower highs then the market is heading toward a reversal (toward a new downtrend). The stochastics, in this case, are saying that the market is overbought, that the currencies are being overvalued. The assumption, then, is that traders will realize that the currency is overvalued and sell, bringing the market into a new downtrend.
It is in this way that stochastics can forecast market corrections – adjustments that the market makes when the price of a currency does not actually reflect its perceived value.
If prices are making lower lows (trending downwards) while your stochastics are making higher lows, then the market is heading toward a reversal (toward a new uptrend). The stochastics, in this case, are saying that the market is oversold, that currencies are undervalued.
The assumption here is that traders will realize that the currency is undervalued and will buy, bringing the market into a new uptrend. Again, stochastics can forecast market movements to correct for undervalued or overvalued currencies.
Notice How the Stochastic Indicator Oscillates between 0-100?
2. The second way to use stochastics is to look at the interaction between the %K and %D lines. If the %K line crosses over the %D line it offers a buy (bullish) signal.
If, the %K line crosses below the %D line it offers a sell (bearish) signal. Be careful to not use this stochastic crossover indicator is markets that are in consolidation (moving sideways) because they will not generate reliable signals.
3. Stochastics are plotted on a scale of 0 to 100. The third way to use stochastics to generate useful information about market movement is to look at the movement of the two stochastic lines (%K and %D) across different levels. The levels between 0 and 100 reveal the strength of price movements in one direction or another.
When either stochastic line (%K or %D) is above 80 it’s signaling strong upward price movement in the market. If either stochastic line crosses above 80, then reverses to fall below it, that offers a strong sell signal because it is a sign that the uptrend is reversing. When the stochastic is at 80 or higher but the market is trending downward, that sell signal is called a sell crossover.
Conversely, when either stochastic line is below 20 it’s signaling strong downward movement. If either stochastic line crosses below 20, then reverses to rise above it, that offers a strong buy signal because it is a sign that the downtrend is reversing. When the stochastic is at 20 or lower but the market is trending upward, that buy signal is called a buy crossover.
There are two additional trading strategies to consider when trading with stochastics on a 0-100 scale:
Strategy #1: a buy 40/40 is a buy signal to trade purely on the momentum of the trend. When the stochastic is at about 50 and trending upward, trade in the direction of the uptrend with a 40-50 pip stop loss and profit limit order.
Strategy #2: Conversely, a sell 40/40 is a sell signal to trade purely on the momentum of the trend. When the stochastic is at about 50 and trending downward, trade in the direction of the downtrend with a 40-50 pip stop loss and profit limit order.
Related posts:
- Forex Online Trading Indicators
- FOREX Trend Prediction MAGIC!
- 56 Pips in 5 Hours with “Psychic” Exit!
Tags: but signal, forex trading, momentum oscillator, sell signal, stochastics, technical indicator Posted in
Rapid Forex on 
Philile on 
Gary Cooper on
March 24th, 2010 at 6:52 pm
man this article is very insightful and helpful. thanks
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March 25th, 2010 at 11:29 am
I don’t like when comments are shamelessly plugging a direct competitors product.
Very interesting read however.
D
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Rapid Forex
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March 25th, 2010 at 12:00 pm
Good call Duncan! I was wondering how to handle that one, I’m going to take your advice…
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March 25th, 2010 at 7:17 pm
This is a cool indicator. I looked at a bunch of charts with stochastics after reading post & it behaves like you way it does. I’m going to leave it on my charts, follow these rules and see if it’s helpful. I’ll let you know when I see some more examples.
-Preston
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March 25th, 2010 at 10:53 pm
This article – whilst no doubt well intentioned – is urging people to put blind faith in statistics. Which is a bad idea.
One of the main causes of the current recession was bankers over-use of statistical models that they only poorly understood.
The statistical model you’re pushing is a major simplification of market behaviour. It will do OK in many cases, and of course there is never a shortage of fools who got lucky who can be paraded to defend any scheme.
If you use statistical techniques without properly understanding the assumptions that lie beneath them – well you are liable to make a loss when those assumptions go awry.
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Rapid Forex
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March 26th, 2010 at 9:12 am
Daniel,
This article isn’t meant to be a standalone trading system, it’s meant to go with all of the other stuff on this blog. You’re right that this is a simplification of market behavior, but that’s also needed to help people get started.
What methods do you use for trading?
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April 14th, 2010 at 9:17 am
What is the time frame where stochastic results best.Is it fine for short term trading.What parameters suits best for short term trading.I read 14,3,3 slow stochastic provides more better results.Your comments?
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Rapid Forex
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April 14th, 2010 at 6:10 pm
14,3,3 is good. You can also sort of double it to 28,6,3. As long as your using the same numbers consistently, you’ll spot the trends within a similar time (perhaps slightly earlier or later than someone else using other numbers). It’s not that important, the only importance is that there are different period averages to show the stochastic oscillation.
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April 21st, 2010 at 7:19 pm
what stochastics and parameter do you use?
There are stochastics, slow stochastics, fast stochastic and stochastic oscillator and more, I guess.
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Rapid Forex
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April 21st, 2010 at 7:20 pm
@Kulvadee – your questions are answered in this post. Please read it carefully
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May 3rd, 2010 at 1:39 pm
Hi Brian
I am still not sure what stochastics and parameters you use.:) (please apology for my english)
My understanding of your answer to Sajid, seem to use Slow Stochastic with parameters 14,3,3 is good and can also use 28,6,3 for short term trading.(I assume short term time frame use 5 min or 15 min chart)
Regarding we trade longer term (Daily and 4hr chart) so can you specify, please?
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May 5th, 2010 at 6:33 am
Also try a 7,3,3 slow stochastic. Put all three (7,3,3; 14,3,3; and 28,3,3) on your chart a look how they interact. Look at a market bottom. As the price starts moving up, look at the slope (angle) of the 7,3,3. I think you’ll see when it is rather steep upward, a good run up occurs. If it is flat or nearly flat, or pointed downward, the move typically goes sideways or even reverses.
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May 5th, 2010 at 7:22 pm
Pardon my ignorance but could you please tell us the timeframes to use?
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May 13th, 2010 at 6:01 pm
Thanks a lot, Regit. I just received your reply by email today(14 May). I’ll try on the chart.:)
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