HOW TO TRADE FOREX WITH STOCHASTIC OSCILLATOR

Searching for an effective indicator that provides valid reversal signal is a common activities of novice forex  traders. I am here to help you, friends. Stochastic oscillator is such an indicator that helps to find the best price level to enter into a currency pair and exit from it.

In stochastic oscillator, two lines, one is main line and another is signal line, are illustrated. The cross overs between these two lines supply the entry and exit signals.

In the stochastic oscillator's window, two horizontal lines 80 and 20 are illustrated. The area above the 80 line is the overbought area and the area below the 20 line is the overbought area.

Source:metatrader4.com

Now we should look for the crossovers. If the main line crosses the signal line from down within the oversold area, the stochastic indicator indicates that the market will go up. In the other side, if the  main line crosses the signal line from up within the overbought area, the stochastic indicator indicates that the market will go down.

Source:metatrader4.com

Using the crossovers we can both enter into the market and exit from it. For example, if we enter into the market with a buy order, we should close the order when the stochastic oscillator makes a crossover within the overbought area. In case of sell order, the order should be closed, when the crossover take place withing the oversold area. I think stochastic oscillator is not an effective tool to set stop loss and take profit levels.

You can increase the accuracy of the signals got from the stochastic oscillator by confirming them with some other indicators and chart pattern breakouts. MACD & RSI can be effective here.

Dear friends, I hope this post will enrich your knowledge of forex trading. You can share your opinion and expertise in below, dropping comments.