How to Use the Stochastic Indicator

The Stochastic oscillator is another forex chart analysis indicator that

helps us determine where a trend might be ending.

This simple momentum oscillator was created by George Lane in the

late 1950s.

Stochastics measures the momentum of price. If you visualize a rocket going up

in the air – before it can turn down, it must slow down. Momentum always
changes direction before price.

While he originally designed the oscillator to follow the speed or

momentum of price, it’s now more popularly used to identify overbought
and oversold conditions.
The 2 lines are similar to the MACD lines in the sense that one line is
faster than the other.
How to Trade Forex 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 currency chart above, you can see that the indicator 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 forex 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.