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This is the most famous and common indicator that traders use. Because the price always rises in the form of wave-making ups and downs. A rule of thumb for trading is that you should sell at the high and buy at the low.

A Comprehensive Guide On How To Read A Stochastic Indicator

Different types of indicators are available on the internet that can show the high and low price zones on the chart. But we will only discuss the top three indicators you should prefer to use in your trading analysis.

Tip: Most traders choose the RSI (relative strength index) indicator, but price action is the best oversold overbought indicator.

The RSI is an oscillator that oscillates between 0 and 100 lines. It is based on average profit and average loss in the previously specified number of candlesticks.

For example, if the price remains above the 70 levels, the price is in overbought condition. And a bearish trend reversal is expected soon. On the other hand, if the price keeps falling below the 30 levels of RSI, it means that the price is in the oversold condition. And a bullish trend reversal is expected soon.

What Is A Stochastic Oscillator? Indicator Formula And Trading Strategies

For optimal results with RSI, I would recommend using 80 RSI levels for overbought conditions and 20 RSI levels for oversold conditions.

Stochastic is an oscillator that compares the single closing price with the range of prices over a certain time interval.

It is similar in action and performance to the RSI indicator. By default, two levels are specified in the indicator’s window. The stochastic 80 levels are used to identify the overbought condition and 20 are used for oversold conditions.

According to technical analysis, a sell signal is generated when the price crosses the 80 value line in a bullish direction. On the other hand, a buy signal is generated when the price crosses the 20 value line in a bearish trend.

Stochastic Oscillator: 399 Years Of Test Data Reveals Surprises

The last and best technical indicator used to identify oversold and overbought price levels is price action. New or intermediate traders find it challenging to use this indicator because it is not straightforward like the RSI and Stochastics indicator.

There are many methods of finding overbought and oversold conditions. I will explain a simple process to determine this.

However, it also depends on the screen time, because a professional trader can name the oversold and overbought regions on the chart with just a single glance.

For example, you trade with a strategy that forms a sell setup. However, if the price is already oversold, the probability of winning or full profit profit will decrease. On the other hand, if the price is already overbought, your strategy also makes a sell trade setup. Then both technical tools indicate a bearish direction. This will increase the probability of winning.

Overbought And Oversold Indicators

It would be best not to rely on the technical indicators for trade setups, but you should add these indicators as a confluence to trade setups.

I have explained three major indicators that traders use. There are many other technical analysis tools in the market, but you should prefer these three.

To use the price action method, you should prefer to backtest at least 70 to 100 times before using it for trading on a live account.

It will draw real-time zones showing you where price is likely to test in the future. With this indicator, you can know the strength of a trend and analyze price movements to know how strongly and quickly the price is moving.

Stochastic Oscillator: Reasonable Classic, Worthy Of Your Trust And Money

%K is the latest market rate for the currency pair. It is multiplied by 100 to move the decimal point two places

The above graphic shows that the low was at $150, the high was at $200 (a range of 50) and the price closed at $180.

From the calculation, the value of the stochastic indicator is 60%, which means that the price closed only 40% (100%-60%) from the absolute peak.

From the above calculation you can see that the stochastic was at a high value. It means that the price closed near the top of the range over a certain period or number of price candles.

A Complete Guide To Stochastic Oscillator

We can also have a low random number. It is an indication of strong momentum to the downside. Consider the following example:

The above gives us a stochastic value of 10%. This means that the price closed only 10% above the low of the range. This means that downward momentum is very strong.

As we will discuss, some traders have a mistaken belief that stochastics point to overbought or oversold levels signaling a reversal.

If you try to enter long positions every time the trade goes below 20, you will simply destroy your trading account.

Stochastic Oscillator Explained

An oversold level should also be considered an indication of a strong trend, not a reversal signal.

When you use a single indicator in isolation, it means that your entire strategy will be based on it, nothing else.

To confirm reversals, trends, volatility and momentum more accurately, combine stochastic with other indicators, price movements and chart patterns.

A pull-back is a short-term movement that goes against the existing direction of the price trend.

Overbought Vs. Oversold Signals: What Are The Differences?

If the market’s movement is above the simple market average, that is, in a bullish environment, you can go long when a pullback occurs.

When the price is below the average and a downtrend occurs, you will have to wait for short entries on pullbacks that occur in the trend.

Some traders claim that a stochastic above 80 means the price is overbought and a stochastic below 20 means the price is oversold.

From this we can conclude that such traders mean that an oversold market has high chances of going down and vice versa.

Overbought Oversold Indicator

From our previous two examples, when the stochastic value is high, e.g. above 80, it is an indication that the trend is strong, not that it is overbought and likely to reverse.

A high stochastic value means that the price can close close to the top and keep pushing higher.

A trend where stochastic stays above 80 for a long time is a signal that momentum is high, not that you should prepare to short the market.

The stochastic entered both the overbought (above 80) and the oversold (below 20) positions and stayed there for some time and the trend continued.

Stochastics: The Ultimate Tutorial For Forex Traders Must Read In 2023!

A high stochastic value is an indication that the trend has long momentum, NOT that it is overbought!

When you see the stochastic accelerating in one direction with the two stochastic bands expanding, it can signal the start of a new trend. If you see a breakout outside of sideways range, all the better.

When the stochastic is within overbought (above 80) or oversold (below 20), don’t fight the trend, but instead stick with it and stick with your trade.

If the stochastic changes direction and leaves the overbought or oversold area, it may signal a reversal.

Minute Binary Options Strategy Using The Stochastic Oscillator

From this, you can conclude that when stochastic exits an overbought or oversold position, it can signal an impending trend reversal

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