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How to trade with Stochastic indicator

Quick Summary of Stochastic Oscillator:

This is a popular indicator that shows where a security’s price has closed. In proportion to its closing price range over a specified period of time. It has two components: %K and %D. %K is most often displayed as a solid line. %D is often shown as a dotted line. The most widely used method for interpreting the Stochastic Oscillator is to buy. when either component rises above 80. Or sell when either component falls below 20. Another way to interpret the Stochastic Oscillator is to buy when %K rises above %D. Whether conversely, sell when %K falls below %D.

  • SO cross may be indicate trend change.
  • Stochastic readings above 80 level — currency pair is overbought.
  • SO staying above 80 levels — uptrend is running strong.
  • Stochastic exiting 80 levels downwards. Expect a correction down or beginning of a downtrend.
  • Same forreadings below 20 level — currency pair is oversold,
  • Staying below 20 — down trend is running strong,
  • Exiting upwards above 20 — expect an upward correction or a beginning of an uptrend

How to trade with Stochastic indicator

  • When %K line from above crosses %D line downwards traders open Sell orders.
  • When %K line from below crosses %D line upwards traders open Buy orders.
  • Stochastic by default has 80% level, above which market is treated as overbought. And 20% level, below which market is considered oversold.
  • Traders are looking for a divergence between Stochastic and the price itself. When the price is making new lows while Stochastic produces higher lows creates dissonance in the picture. It is called divergence. Divergence between price and Stochastic readings suggests a forming weakness of a main trend and therefore its possible correction.
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About Dwipen Gogoi

Dwipen Gogoi, MBA (IB and IT) and PGDFT from Pune. (Technical Analyst of AliceBlue) I am a You Tuber, Blogger and doing Technical Analysis last 10 years in Stock, Commodity and Forex Market. i am creating various trading strategies for day traders, swing traders, scalp traders.

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