Stochastics Oscillator Overbought and Oversold Levels
Stochastic oscillator is used to look for over-bought over-sold signals. Overbought levels are above 80% level & oversold levels are below 20% level.
The key is to not only look at Stochastic oscillator indicator when the %K or %D lines touch or cross overbought/oversold, but also when they cross over & back through these technical levels.
Just as with other momentum indicators such as RSI the Stochastic oscillator indicator can stay inside the overbought & oversold levels for a while. When this stochastic oscillator indicator stays within these levels for a long time it indicates strong upward trend (overbought) or strong downwards trend (oversold).
When the stochastic lines cross back below or above these overbought & oversold levels it is usually a good signal indication of an upcoming trend reversal.
A trader can look for further forex signals to make the over-sold or overbought levels more reliable if:
Buy Trading Signal Using Stochastic Oscillator Oversold Levels
- Before Buying a instrument, the %K & %D lines turn upwards from below 5%.
- A reading that is floating near 5% means that bears are in control & there is selling of the instrument. A trader should wait for the Stochastics Oscillator to move back above 5% as a sign that the selling pressure is easing.
The Buy trading signal is confirmed when the stochastic oscillator indicator goes above oversold, then after a while returns to over-sold but this time it moves up immediately without staying at the oversold.
Buy Trading Signal Using Stochastic Indicator Oversold Levels
Sell Signal Using Stochastic Oscillator Overbought Levels
- Before Selling a instrument, the %K and %D lines turn down from above 95%.
- A reading that is floating above 95% means that bulls are in control & there is buying of the instrument. A trader should wait for the Stochastic oscillator to move below 95% as a sign that buying pressure is easing.
- The sell signal gets to be confirmed when stochastic oscillator goes below over-bought, then after a while returns to overbought but this time moves down immediately without staying at the over-bought.
Sell Signal Using Stochastic Oscillator Overbought Levels
Looking at different trade chart time-frames when using oversold & overbought levels can also help to figure out the correct entry strategy when opening a trade.
Main theory is to trade with the market trend. Always double check the signals with the longer term stochastic oscillator indicators to confirm signals on the shorter trade chart time frame periods.
Study More Guides & Courses:
- How Much is a Forex Pips on a Mini FX Trade Account?
- Forex Accumulation/Distribution Expert Advisor Setup
- Gold Leverage
- Which Broker Can I Use to Trade CAC 40 Stock Index?
- Stock Index Trading Strategy for HK 50 in FX
