How to use stochastic indicator to maximize profits in trading.

Do you want to learn how to close more winning trades in the securities market?

I have been trading with the stochastic indicator for a long time until recently when I decided to re-evaluate my trading indicators that I realized that I have been missing some few points.

This indicator can be very powerful expecially when it’s used in the right way and at the right time.

In this blog post, I will be showing you how to close more profitable trades by using the stochastic indicator in the right way.

What is stochastic indicator
Stochastic indicator is a Momentum indicator that is used to predict oversold and Overbought conditions in the securities market.

This indicator can also be used to mark the entry and exit points in a trading strategy.

Creative traders can use the stochastic oscillator to accomplish just about anything but only when they have mastered the workings of the indicator properly.

List of Indicators that can replace stochastic
Other indicators that work in the same way as the stochastic indicator is the Relative strength index (RSI) commodity channel index (CCI) and it’s sister the Larry Williams %k.

The above indicators can be used to confirm the signals indicated by the stochastic for more accuracy and to boost your confidence level.

How do you setup the stochastic indicator?
Stochastic indicator is basically an oscillator that is marked from 0 to 100 with the under 20 signalling an oversold condition while the over 80 signalling an Overbought.

When the slow %k crosses the %D in the Overbought region, it is a signal for entering a long possition. Opposite is true for a short possition, that is, when %k crosses the %D from above in the oversold region.

Sources of errors while using stochastic
The most common source of error when using the stochastic is entering a long possition when the indicator crosses into the oversold region or entering into a short position when the indicator breaks into the Overbought region.

It should be noted that the stochastic indicator is a Momentum indicator and it shows that the trend is gaining momentum and closing higher than the previous day’s.

When the stochastic indicator is in the Overbought or the oversold regions, it signifies a very strong momentum and you should not trade against the trend unless when the crossovers take place and the the stochastic indicator is falling back from the extremes.

This fallbacks and crosses of the stochastic indicator should be supported by other technical indicators for it to be taken as serious signals by the analyst.

Supporting indicators for stochastic
Like the other indicators, stochastic indicator is not to be used as a stand alone indicator, it should be used with other indicators like the moving averages and the on balance volume.

The stochastic indicator is well know as an indicator for range trading strategies. Together with support and resistance lines, it can produce winning trades.

Breakout from the range can be spoted when the two stochastic lines are suddenly widening and accelerating towards on direction.

The trend towards a given direction is taken to be valid as long as the two lines are still open and have not crossed each other.

How do you setup the stochastic indicator?
The stochastic indicator comes with the settings of (5, 3, 3). The most important number that you can always change is the first one, that is, number 5. Some traders can also change the other numbers.

You can change the number 5 which is actually a short term to a longer term like 20. There are 20 trading days in a month, that’s how we got the number 20 and we divide it by four to get 5 which is the five trading days in a week.

To better understand how you can adjust the stochastic numbers, it is better is you find out how this numbers are calculated in the first place.

Inside the computer, this is actually what is taking place, let us have a look…

In conclusion

Understanding the workings of the stochastic indicator can help the trader to make more money in the trading business.

Learn everything you can before you start using this indicator by downloading books that are dedicated to this indicator.

I hope this post have shade light on this indicator, if you want more info, feel free to contact me through email and I will be able to answer the queries that you have about stochastic indicator and online trading.

Leave a Reply

Your email address will not be published. Required fields are marked *