Stochastic

Stochastic is another indicator that can tell us when a trend may be ending. Stochastic is an oscillator that measures the conditions of over-purchase and over-sell of the market. It has two lines similar to those of the MACD indicator in the sense that one is faster than the other. Thanks .

 

 

How to use Stochastic?

As we mentioned before, stochastic tells us when the market is in conditions of over-buying or over-selling. Stochastic uses a scale from 0 to 100.

When the stochastic lines are above 70 (the dotted red line on the chart above), it means that the market is in over-purchase.

When the stochastic lines are below 30 (the dotted blue line), it means that the market is in over-sales.

As a general rule, we buy when the market in over-sell and sell when the market is in over-purchase conditions.

 



 

Looking at the graph above, we can see how the Stochastic shows us market over-buy conditions for a while. According to this information, can you predict where the price is headed?



If you said the price would go down, you were right! Because the market was in over-bought condition for so long, reversal of the trend was very possible.

Many traders use stochastic in different ways but the main purpose of the indicator is to show us when the market is in over-bought or over-sold conditions.

In time you will learn to use Stochastic according to your personal way of operating. In the following article we will learn to handle the following indicator: the RSI. Thanks.

 

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.