subject: Stochastics For Forex Traders! [print this page] Stochastics is one indicator that is widely used by traders. It is freely available. However, most trader don't know how to trade using the stochastics. Stochastics is based on the plot of two lines called %K and %D. K is calculated using the Close (C), High (H) and the Low (L) of a period that is usually 14 days. The formula to calculate K is K=100(C-L)(H-L). %K is the 3 day Moving Average of K while %D is the 3 day Moving Average of %K.
Fortunately, you don't have to go into all this maths unless you want to fiddle with it and see if you can make it work better. One common question is how many days to use in Stochastics. Stick with 14 days as it is the default. Longer period means lesser signals and lower whipsaw while shorter periods means more signals and more whipsaw.
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.
Overbought and oversold condition only works in the sideways market but it completely fails in a trending market. So, one way to overcome this failure is to buy when the stochastics is above 80 and %K crosses down below %D. Similarly, sell when the stochastics moves below 20 and %K crosses above %D.
You can also trade using %D and %K crossovers that happen when the stochastics is above the 80 line or below the 20 line.
Left handed Crossover takes place as %K crosses %D when it is climbing whereas the Right Handed Crossover occurs when %K crosses %D hump from the right.
by: Ahmad Hassam
welcome to Insurances.net (https://www.insurances.net)
