Stochastic indicator

The Stochastic indicator in Forex is a momentum indicator used in technical analysis, introduced by George Lane, to compare the closing price of a commodity to its price range over a given time span.

The idea behind the stochastic indicator in Forex is that prices tend to close near their past highs in bull markets, and near their lows in bear markets. Transaction signals can be spotted when the stochastic indicator crosses its moving average.

Two stochastic oscillator indicator are typically calculated to assess future variations in prices, a fast (%K) and slow (%D). Comparisons of these statistics are a good indicator of speed at which prices are changing or the impulse of price.

The fast stochastic oscillator or Stoch %K calculates the ratio of two closing price statistics: the difference between the latest closing price and the lowest closing price in the last N days over the difference between the highest and lowest closing prices in the last N days.

The slow stochastic oscillator or %D calculates the simple moving average. 

In Forex trading are two well known methods for using the %K and %D indicators to make decisions about when to buy or sell stocks. The first involves crossing of %K and %D signals, the second involves basing buy and sell decisions on the assumption that %K and %D oscillate.

There are two well known methods for using the %K and %D indicators to make decisions about when to buy or sell stocks.

The first case, %D acts as a trigger or signal line for %K. A buy signal is given when %K crosses up through %D, or a sell signal when it crosses down through %D.

The second case, some analysts argue that %K or %D levels above 80 and below 20 can be interpreted as overbought or oversold. They recommend that buying and selling be timed to the return from these thresholds. In other words, one should buy or sell after a bit of a reversal.

If you understand the basic rules of the stochastic indicator, can be very useful in Forex trading.