Indicator Stochastic
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Thread: Indicator Stochastic

  1. #1
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    Indicator Stochastic

    Brief introduction of Indicator Stochastic : The Stochastic oscillator is a momentum indicator that was developed by George C. Lane in 1950’s. Due to its simplicity in use this indicator is common among traders. Traders can use the Stochastic mainly to pinpoint trend reversals.. This indicator being a momentum indicator can be used to judge when the market is gaining or losing steam in a particular direction.


    Viewing The Stochastic oscillator on the chart
    : The Stochastic oscillator consists of two lines.

    1. The indicator itself represented in Violet
    2. A signal line reflecting the three-day simple moving average (SMA) represented in green.

    When these two lines intersect it may signify that a trend shift may be about to happen.

    s1.jpg


    Using The Stochastic oscillator in trading
    : Basically The Stochastic oscillator can show us the following two things in our trading

    1. A trend shift or reversal
    2. Overbought or oversold positions.


    1.How does The Stochastic oscillator show us a trend reversal or trend shift
    : We have already learned that the indicator consists of two lines. The indicator itself and a signal line. When these two lines intersect each other then that denotes a trend reversal is about to happen. For instance if the prices have been moving up and the two lines intersect then that can denote a future downtrend.

    In the below image we can see that prices of USDJPY fell when the two lines intersected each other.

    s3.jpg


    2. How does The Stochastic oscillator show us Overbought and oversold prices
    : Stochastic is a momentum oscillator which can show us overbought or oversold conditions. Ranging from 0 to 100. Above the 80 level we can consider that the prices are overbought. Below the 20 level the prices can be considered as oversold.

    s4.jpg

    Useful tip
    : A trader would not like to follow each and every signal that is given by an indicator. Our focus is always on taking the stronger signals and leaving the weak. Regarding the Stochastic we can simply take the crossovers that happen at the extreme levels. For getting better signals of trade shift or reversal we can consider the crossover of the two lines in the overbought or oversold range that is above the 80 or below the 20 levels.


    My opinion
    : This indicator has stood the test of time and have given good signals for major currency pairs. However this Indicator has also given false signals a couple of times. Success rate is good and we can use a stop loss to cut our losses at the time of false signals.Safety is priority as there have been never a magical indicator that has always given flawless signals.


    Setting the The Stochastic indicator on our terminal
    : While using the indicator we can leave the parameter settings as it is. Under colors you can chose simply what appeals you more. I have chosen violet and green. For levels I have chosen the white style. For visualization it is "all timeframes".

    s6.JPG

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  2. #2
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    That's fantastic sir, I think you have really explained well how trader's could use this indicator in their trading. I think for scalping, divergence and convergence, trend reversal analysis this is a very good indicator. Personally I like the trend shift or reversal function of this indicator. As a trend follow I like to use CCI, Stochastic some time, they are really helpful for me.

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  3. #3
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    Dear you have got an interesting Presentation on the Indicator Stochastic. I also often use this indicator and it has stood the test of time in giving more correct signals of its kind. Just we have to focus on using it well. The tip you gave is correct. We should open trades at the extreme levels. When there is a crossover above 80 and below 20.

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  4. #4
    Trader Hukam's Avatar
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    Yeah mate there is a very simple way to use this indicator for getting signals, A good use of money management, risk management, stop loss and good understanding of market could give trader's a very good opportunity to make money with those 80 and 20 levels. I am not using stochastic but there is no doubt in it that it could be effective if we have good understanding of using it.

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  5. #5
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    Before using these indicator's its very important to know about their weaknesses and you really explained well that in my opinion section of your thread. I think there are many more features of this indicator stochastic but your have explained well about the trend reversal, and over bought and over sold conditions. One more question which time frame you would suggest to use with this indicator?

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  6. #6
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    Stochastic indicator is one of the best indicator to make sure that how overbought and oversold is the market. Making money in the forex market is not that of an easy thing to do. making money in the forex market is not that easy thing to do. Making money is tough.

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  7. #7
    Trader layigold's Avatar
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    I have removed stochastic from the list of indicators that I use because it is too lagging for me . I have seen cases where stochastic indicator shows that the market is over bought and that is even where the market has just started going North. It could be very dangerous for a trader to over depend on a single technical indicator but if you can effectively combine like two or three different indicators together, it will be a lot better

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  8. #8
    Trader shambca7's Avatar
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    Quote Originally Posted by layigold View Post
    I have removed stochastic from the list of indicators that I use because it is too lagging for me . I have seen cases where stochastic indicator shows that the market is over bought and that is even where the market has just started going North. It could be very dangerous for a trader to over depend on a single technical indicator but if you can effectively combine like two or three different indicators together, it will be a lot better
    The same problem I have also faced in my trading method even I am not using this for my second confirmations now. I am using moving average, and support and resistance based indicator for my help. I don't like lagging nature indicator's because they don't have a good clearance about the signals, Any time it can reverse the signal and you can get the wrong confirmations that's why I love technical indicator's only.

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  9. #9
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    in my opinion that this indicator is good for exit signal only because it intersect much times and this is not an indication about changing the direction of the market and reversal of the trend, or it can be used as an entry signal but in the same direction of the market to make trading more safe and more profitable and less risky.

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  10. #10
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    Quote Originally Posted by sameeh View Post
    in my opinion that this indicator is good for exit signal only because it intersect much times and this is not an indication about changing the direction of the market and reversal of the trend, or it can be used as an entry signal but in the same direction of the market to make trading more safe and more profitable and less risky.
    i agree with you here, stochastic can give a clear indication of when to get out of a trade whether it is profitable and in the case it is not profitable the indicator assist you in minimizing the risk of losing more money by getting out of the trade early enough and avoid major loses that can wipe your account

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