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Stochastic

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					Stochastic

The Stochastic is another indicator that helps us determine where a trend
might be ending.

By definition, a Stochastic is an oscillator that measures overbought and
oversold conditions in the market. The 2 lines are similar to the MACD
lines in the sense that one line is faster than the other.



How to Trade Using the Stochastic

As we said earlier, the Stochastic tells us when the market is overbought
or oversold. The Stochastic is scaled from 0 to 100.

When the Stochastic lines are above 80 (the red dotted line in the chart
above), then it means the market is overbought. When the Stochastic lines
are below 20 (the blue dotted line), then it means that the market is
oversold.

As a rule of thumb, we buy when the market is oversold, and we sell when
the market is overbought.



Looking at the chart above, you can see that the Stochastic has been
showing overbought conditions for quite some time. Based on this
information, can you guess where the price might go?



If you said the price would drop, then you are absolutely correct!
Because the market was overbought for such a long period of time, a
reversal was bound to happen.




That is the basics of the Stochastic. Many 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.

Over time, you will learn to use the Stochastic to fit your own personal
trading style.

Okay, let's move on to RSI.



Read more: http://www.babypips.com/school/stochastic.html#ixzz1Z0AEJm7P

				
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posted:9/26/2011
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