Stochastics Indicator

The stochastics indicator has been a favorite since the 1950’s when it was introduced by George C. Lane. It is comprised of the %K component and the %D component. The %K is shown as blue while the %D is in red.

The %K is calculated by this formula: %K = 100 x (Recent Close- Lowest Low)//( Highest High- Lowest Low). The %D component comes from the 3 MA (simple or moving).

The stochastics would come in handy the most in a ranging market. It’s purpose is to detect overbought/ oversold levels.

The idea behind the stochastics is that in a bullish trending market, prices seem to close near their high, and while in a bearish trending market, prices seem to close near the low.

A simple strategy with the stochastics is that when you are in a downtrend and the stochastics are above 80 (overbought) – that is a sell signal.

The opposite is true for this strategy. When you are in an uptrend ( let me clarify, long term uptrend) and the indicator is oversold (below 20) – that is a buy.

Here’s an example of what this strategy would look like:

Here is a great article about stoachastics and how to put them into action.

More Indicator Articles

Why Use Indicators?
How to Trade the Parabolic SAR
Stochastics Indicator
Using Murray Lines
Forex Power Indicator
Technical Indicators
Using Simple Moving Averages
Ichimoku Kinko Hyo Indicator
Average True Range (ATR)

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