Forex indicators uncovered: Use this tool to generate buy and sell signals

by , 12 August 2015

Technical analysis can work really well with forex trading.

There are a wide number of different tools at your disposal. One group of tools looks at the divergence of the price of a currency pair and an oscillator.

One of these oscillators is the stochastic oscillator.

So how do you know when the stochastic oscillator generates buy and sell signals when you trade forex? And what settings should you use?

Read on to find out…


How the stochastic oscillator works


The stochastic oscillator works by looking at the price behaviour of an underlying currency pair. It’s a leading forex indicator for when a change in trend is likely in the price of a currency pair.

It works on the premise that when a currency pair price gets overbought, closing prices tend to trade at their daily highs and when a currency pair prices gets oversold, closing prices tend to trade at their daily lows.

The stochastic oscillator uses two lines: %K (the stochastic oscillator) and %D (the moving average).

%K looks at the current closing price and the lower low of the past eight days along with the highest high of the past eight days.

If you want to read more about how the stochastic oscillator works, click here.


How to use the stochastic oscillator to buy and sell


Buy signals
The stochastic oscillator generates a buy signal when the %D line crosses the %K line from below to above, and this is under the 10 line.

Sell signals
The stochastic oscillator generates a sell signal when the %D line crosses the %K line from above to below, and this is above the 90 line.

You can set the parameters of the stochastic oscillator on the platform you use. The settings that work best with forex trading is 8, 3, 3. The default setting is 5, 3, 3.

So there you have it. How to use the stochastic oscillator to generate buy and sell signals.

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