Stochastics

 Oscillators such as Stochastics,RSI,ROC are important

tools in the hands of a trader trading on technical
analysis. But oscillators are generally used in a wrong
way and the common reaction of traders is to sell if the
oscillator goes into overbought zone and buy once it
moves in oversold zone.

The above is too simplistic way of trading with an

oscillator....here we will discuss some nonconventional
ways.....

Best wishes for the " Oscillating Roller Coaster Journey"

 Smart_trade
 I would like to share an important phenomenon
regarding oscillator overbought/oversold conditions.
Whenever an oscillator like Stochastics,( or even
RSI,ROC etc ) stays above the overbought limit for more
than 5 bars without taking a dip from overbought to
neutral zone....the market has a lot of steam left further
to go up, market then continues upward journey,then
comes down,then goes into overbought zone again but
shows negative divergence and then only it comes
down...till then it keeps making higher tops. This is a
very strong bullish signal to trade.....
Mirror image for oscillator staying in oversold region for
more than 5 bars...
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 10 SOME BASICS
 Calculation and Formula
Stochastic %K = 100 X (Close - Lowest Low) /
(Highest High - Lowest Low)
 Stochastic plots the position of price in relation to
its low and high from several last bars - that is, its
support and resistance levels. So the Lowest
Close and the Highest Close of the price in last 10
bars is calculated, and the location of price in
relation to these levels is calculated - as a number
between 0 to 100.
 Stochastic is usually smoothed (or slowed) using
a Moving Average. The result of the smoothing is
known as the Stochasic %D.
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 Traditional Interpretation
The premise behind the indicator is that
above 80 the price is overbought, and
below 20 the price is oversold. The
assumption is that the level of 0 and 100
are the past Support and Resistance, and
therefore price will stop at these levels
and reverse.
 Long Signal - When price crosses 20 level
from below.
Short Signal - When price crosses 80 level
from above
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 This indicator is a Range indicator, that works best in
periods of minimal trend. In period of trend this indicator
usually gives false signals, because the Highest close or
Lowest close are NOT Support nor Resistance. This is why
this indicator is usually more powerful when combined with
a Range filter, such as a Moving Average Slope indicator.
 Another interpretation is using the %D and %K crosses.
%D is the Smoothed version of the %K line, and trading
signals are generated in the following way:
 Long Signal - When Stochastic %K crosses %D from below.
Short Signal - When Stochastic %K crosses %D from above.
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 Trend-Following Interpretation Long
Signal - When price crosses 80 level
from below.
Short Signal - When price crosses 20
level from above.
Exit Signal - When Stochastic %D
crosses %K in direction reversed to
open trade.
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 Researches show that in Forex the best trading
results are yielded when using a 60-40 levels in
the Trend-Following system, that is: Long signals
are from level 60 and above, and Short is level 40
and below. This allows traders to enter trades
earlier in the development of trend, and take
larger profits.
 Conclusion
In conclusion, the Stochastic indicator is a very
good in ranging period, and weaker in trending
phases. Be sure to confirm its signals with the
proper market phase, for maximum profitability.