The stochastic oscillator is one of the most popular indicators technical analysts use when looking at securities prices. A stochastic indicator comprises two indicators called the “stochastics”, which uses selected closing prices in their calculation. These are usually combined with other tools, such as moving averages to achieve better investment returns.
In Singapore, using the stochastic method provides accurate predictions about 60% of the time. This article looks at what a stochastic indicator is and how it can be used as part of an investment strategy in Singapore.
How does the stochastic indicator work?
A stochastic indicator is a technical analysis tool that traders can use to identify overbought and oversold conditions in a security or market. The stochastic oscillator is one of the most popular indicators and comprises two lines, the %K line and the %D line. The %K line is calculated by taking the latest closing price and dividing it by the highest high over the past n periods. The %D line is calculated by taking the latest closing price and dividing it by the lowest low over the past n periods.
The stochastic oscillator moves between 0 and 100 and can be used to identify when a security or market is overbought (above 80) or oversold (below 20). Traders can also use it to identify potential price reversals.
The %K line is displayed as the bottom number on the oscillator, while the %D line is displayed as the top number. Generally, when both lines are below 20, it suggests that a market or security is oversold, indicating that an upward trend may begin soon. Alternatively, if both lines are above 80, it suggests that a market or security is overbought and could suggest that a downward trend may kick in soon.
However, there are some exceptions to these general rules where traders should consider other technical analysis tools before taking any action. It’s also important to note that most trading platforms, such as forex traders, allow you to place custom indicators like stochastics on your charts, which can be a great way to research any potential trading opportunities further.
Advantages of using a stochastic indicator
When used with other technical indicators, the stochastic oscillator can provide traders with powerful insights into market trends and potential reversals. This article will explore how to use the stochastic oscillator in Singaporean markets and discuss some of its most popular applications.
Also, using a stochastic indicator is seen as more accurate because it can account for pessimistic and optimistic attitudes in Singapore’s financial markets, which are usually reflected by the difference between two moving averages.
How to use stochastic oscillators in your trading strategy
The stochastic oscillator can be used in various ways, but the most common applications are as a momentum indicator and as a divergence indicator.
Momentum Indicators
The simplest way of using the stochastic oscillator as a momentum indicator is through overbought and oversold readings. Typically, traders will identify where key support and resistance levels are located on their charts (these can be based on trend lines or Fibonacci retracements), then use these levels as overbought or oversold zones.
Divergence Indicator
A divergence occurs when price action and the stochastic oscillator move in different directions. This is often a sign that a significant reversal is imminent. Traders will want to wait for confirmation from the stochastic oscillator and their other indicators before entering a trade.
Conclusion
So, if you’re interested in the forex trading market and using a stochastic indicator to help you make informed investment decisions, it’s important first to understand how this tool works and what it can tell you about the security or market you’re considering investing in. With a bit of practice, you’ll be able to use this indicator to its full potential and improve your chances of making profitable investments. New traders are advised to use a reputable online broker from Saxo Bank and sign up for a demo account before investing their money.
