Forex Technical Analysis : Stochastic :


The stochastic indicator was developed by Georges Lane in the 1950s. This indicator is one of the most popular on Forex.

The term stochastic can be misleading. Indeed, the term "stochastic" is used in statistics for the study of random phenomena.

On the forex, stochastics is a momentum indicator that allows to judge the position of the fence at a time t with respect to the range (deviation) higher / lower over a given period. Closure prices near the peak of the reference period generally indicate an accumulation (buying pressure). Conversely, closing prices close to the lower of the reference period generally indicate a distribution (sales pressure).

The stochastic consists of two lines: a fast line called the% K and a slow line called the% D.

• The first step to calculate a stochastic is to obtain the "crude stochastic" or the% K

% K = (Cauj-Bn) / (Hn-Bn) * 100

Cauj = closing of the day

Bn = the lowest recorded on the number of days selected

Hn = the highest recorded on the number of days selected

N = the number of days selected by the trader for stochastics

The standard width of the stochastic time window is 5 days, although some traders use much stronger values. A narrow window allows to identify more turning points, but a larger window allows to identify the main turning points.

• The second step is to build the% D. This curve is obtained by smoothing the% K usually over a period of three days.

• Stochastics shows when bulls or bearers are getting stronger or weaker. From this we can deduce three types of signals:

1. Differences

2. oversold and overbought

3. their direction

A bullish divergence occurs when prices fall on a new low but stochastics plots a lower one above that recorded during the previous decline. This shows that bearers lose strength and that prices fall simply by inertia.

When the stochastic climbs above its upper reference line, it means that the market is overbought.

Conversely, when the stochastic falls below its lower reference line, this means that the market is oversold.

When the two stochastic curves go in the same direction, they confirm the short-term trend. When prices rise and rise in the two stochastic curves, it is because the upward trend is likely to continue. When prices slide and stochastic curves fall, the downward trend in the short term is likely to continue.
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