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.

Fortunately, you don't have to go into all this maths unless you want to fiddle with it and see if you can make it work better. One common question is how many days to use in Stochastics. Stick with 14 days as it is the default. Longer period means lesser signals and lower whipsaw while shorter periods means more signals and more whipsaw.

Stochastics is often referred to as the overbought and the oversold indicator. When it moves above the 80 line, the market is said to be overbought and when it moves down below the 20 line, the market is said to be oversold. But simply buying on overbought and oversold will make you lose money.

Overbought and oversold condition only works in the sideways market but it completely fails in a trending market. So, one way to overcome this failure is to buy when the stochastics is above 80 and %K crosses down below %D. Similarly, sell when the stochastics moves below 20 and %K crosses above %D.

You can also trade using %D and %K crossovers that happen when the stochastics is above the 80 line or below the 20 line.

Whatever, stochastics is one indicator that is widely used and you must master it!