subject: Trade Forex With Stochastic Indicator [print this page] Trade Forex With Stochastic Indicator
Let us first see what is meant by overbought and oversold. when the currency has more demand with respect to another currency, the price will go up for that currency. when this occur for long period and the price continues to grow, the price will be in the overbought condition.
Similary, when currency has less demand with respect to another currency, the price will continue to go down. when this occurs for large period, the currency price will be in oversold conditions.
The stochastic indicator is used to determine whether the currency price goes in the overbought or oversold conditions. it gives a percentage that indicate the level of increase or decrease for the currency price. when this value is greater that 80% for long time, the price is overbought. if it is less than 20% for long tinme, the price is oversold.
Once the forex trader notices the overbought or oversold conditions using the stochastic curve, the trader can enter a trade. if he price is in the overbought condition, the trader should go short. if the price is in the oversold condition, the trader should go long.
The more the time the currency price is in the overbought or oversold conditions, the more likely a reverse will occur in the currency price. moreover, this reverse will be large in value and the price will change too large. this is because that when the power of buying or selling has been finished in the above in the overbought and oversold regions. thus, there are no more people remaining to buy in the overbought region and there is no more people remaining to sell in the oversold region.
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