Let’s review at another forex indicator – Stochastics. Stochastics indicator was developed in late 1950s by George Lane. It is designed to hint us when the trend might end.
Forex Indicators - Stochastics
If you take a look at Stochastics it will somewhat remind you of MACD. Stochastics are made of two lines which are drawn according to the highest and lowest prices in a selected period of time. The two lines are the following:
1. a “main line” which is drawn as a solid line and is called %K
2. a simple moving average which is drawn as a dotted line and is called %D
There are three types of Stochastics: full, fast and slow. All of the types are almost identical; except for one is smoother then the other. The smoothest one of all, you can probably guess by now, is the full stochastics, then goes the fast type and the last one is the slow.
What does this all mean and how to apply it? Stochastics indicators are ranging from 0 to 100. The upper limit marked at 80% and the lower limit is marked at 20%. When stochastics lines go above the upper limit it shows us that the market is overbought. When stochastics lines go below the lower limit it shows us that the market is oversold. As for the application, just remember that you have to BUY whenever the market is oversold and to SELL when ever the market is overbought. You as forex trader should watch out closely for the buy and sell signals to make the right decision. Another BUY signal is when %K line crosses %D line either from below upwards or from above downwards.