Stochastic oscillator is a technical analysis tool that is useful for knowing the final sign of a trend.And by definition a stochastic is an oscillator that calculates overbought and oversold conditions in the forex market . It has two lines that are the same as the MACD indicator, that is, the one whose reaction is faster to the price change compared to the other line.
How to trade using the Stochastic indicator
The Stochastic indicator has a scale of 1-100 and we have already discussed that this indicator calculates market conditions whether they are overbought or oversold .
When the stochastic line is above the 80th scale (broken red line), the market is said to be overbought and if it is below the 20th scale (dashed blue line) the market is said to be oversold .
Like the previous trading rules that we will open long positions when the market is oversold and open a short position when the market is overbought .
We see that market conditions are overbought (overbought) for a while and based on the information submitted by the stochastic indicator we can guess where the next price movement is going 🙂
If your prediction is that prices will move down then your prediction is correct! and I say Congratulations 🙂 because the market has been overbought for over a long period, it is likely that a reversal signal will be formed.
Well 🙂 that was written about the basic stochastic indicator and lots of forex traders and stocks that use it in various ways to predict a reversal signal. But keep in mind that this tool helps us see market conditions whether they are overbought or oversold .
You can combine Stochastic with other indicators such as MACD , RSI , Bollinger Band , or ADX to get the right prediction results 🙂