The word stochastic is derived from the Greek meaning "to guess" or "to aim."
The term's application in investment is to ‘guess at’ the likelihood of a continuing trend – the probability is expressed in percentage. Stochastic indicators are called ‘oscillators’ in the sense that they fluctuate somewhat rapidly up and down, in a wavelike manner, generating buy and sell signals.
Forex traders use many different types of stochastic indicators – every trader has his or her favourites. Most trading platforms will allow you to plug in more than thirty different choices.
But there are a few that are considered mainstream, in the sense that they have been tried and found useful by an overwhelming majority of traders. We’ll look at these.
The classic stochastic indicator is also a very useful way to determine entry and exit strategy.
The Stochastic Oscillator consists of two lines, and, when both lines are included on a price chart, it is referred to as the Full Stochastic.
The first line follows the current price for the currency pair, and the second line treats the price as a moving average. You can adjust for the period you prefer.
The Stochastic is scaled from 0 to 100.
When the Stochastic lines move to above 80, then it means the market is overbought. When the Stochastic lines fall to below 20, then it means that the market is oversold.
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