You must learn how to use Stochastics in your forex trading. Many traders use it incorrectly. It is a very good indicator that if used properly can be highly profitable. Stochastics is based on two plot %K and %D. %K is the fast moving plot while %D is the slow moving plot. K is calculated using this formula; K=100*(C-L)(H-L). C, L and H are the Close, High and the Low of 14 days period. %K is the 3 day MA ( Moving Average) and %D is the 3 day MA ( Moving Average) of %K.
But you don’t need to know all these formulas when you trade with Stochastics. 14 days period is the default setting for the Stochastics. 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. Stochastics is often used as an overbought and oversold indicator. Typically when the Stochastics 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 Stochastics.
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.
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