A stochastic indicator refers to technical oscillators that are used to identify the level, at which trend is likely to end. As a rule, it works on the two major concepts. The first one considers that the price will move above its closing level or at least remain the same during the uptrend. According to the second concept, the price is going to be equal or go below the closing rate during the downtrend.
Created during the 1950s, this indicator is very simple to read. If you are new to this oscillator, this article will show how to use a stochastic indicator under real market conditions.
What Is a Stochastic Indicator?
It is generally used to measure the degree of the price change with one closing point on the one hand and the current direction on the other. It helps to understand how the trend will move and if it is going to change the direction.
The indicator depicts two lines that are equal to those we have already seen in the MACD chart. It is supposed that one line moves faster than the other one. So, you need to understand how to read the indicator properly.
How to Read the Stochastic Indicator
It comes with a scale from 0 to 100. Just as other range-bound oscillators, a stochastic indicator makes it possible to identify the periods when the market is overbought or oversold. To read it properly, you need to keep in mind the following:
- If the indicator reading scales over 80, it means that the market has reached its overbought conditions;
- If the indicator is below 20, the indicator says that the market is oversold.
Besides, we need to note that the indicator uses baseline 14-period settings. In other words, it does not matter where it scales. The price movement changes in accordance to its trading range over the last 14 periods.
Note: the oversold market reading does not always mean bullish. The same way, oversold conditions are not necessarily bearish. The indicator may stay on the same scale for a long period. You still need to follow the trend direction during trading and keep an eye on the overbought readings during the downtrend and vice versa.
Stochastic indicator is avalable at MetaTrader 4. Download it for free!