Using Stochastics to Time Your Trades

The Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. The indicator can range from 0 to 100.

The closing price tends to close near the high in an uptrend and near the low in a downtrend. If the closing price then slips away from the high or the low, then momentum is slowing. Stochastics are most effective in broad trading ranges or slow-moving trends. Two lines are graphed, the fast oscillating %K and a moving average of %K, commonly referred to as %D.

Momentum shifts directions when these two Stochastic lines cross. Therefore, a trader takes a signal in the direction of the cross when the blue line crosses the red line. As you can see from the picture above, the short-term trends were detected by Stochastic. However, traders are always looking for ways to improve signals, so they can be strengthened. There are two ways we can filter these trades to improve the strength of signal.

Many forex traders use the Stochastic in different ways, but the main purpose of the indicator is to show us where the market conditions could be overbought or oversold. In this class we will look at 4 different strategies using fast and slow stochastics.

John Roman 
John is an active trader and educator at Investors Trading Academy with an MBA in Finance from New York University.  He began trading in 1995 focusing mainly on commodities and options, then transformed into forex investment. His current specialization covers all aspects of forex trading utilizing fundamental and technical analysis, namely chart pattern analysis. Mr. Roman has conducted training seminars on all over the world from novice to innovative strategies.  He provides a solid, collaborative and extremely encouraging training atmosphere to assist Forex traders in locating and trading momentum moves, using confirmed patterns and methods.