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How to Trade Stochastics Like the Pro’s Do

23. How to Trade Stochastics Like the Pro's DoPractice these concepts with a free practice charting and trading account here:

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A lesson on how to trade the stochastic oscillator for active day traders and investors using technical analysis in the stock market, forex market. and futures market.

In our last lesson we learned about the RSI indicator and some of the different ways traders of the stock, futures, and forex markets use this in their trading. In today's lesson we are going to look at another momentum oscillator which is similar to the RSI and is called the Stochastic.

Let me start by saying that there are 3 different types of stochastic oscillators: the fast, slow, and full stochastic. All of them operate in a similar manner however when most traders refer to trading using the stochastic indicator they are referring to the slow stochastic which is going to be the focus of this lesson.

The basic premise of the stochastic is that prices tend to close in the upper end of their trading range when the financial instrument you are analyzing is in an uptrend and in the lower end of their trading range when the financial instrument that you are analyzing is in a downtrend. When prices close in the upper end of their range in an uptrend this is a sign that the momentum of the trend is strong and vice versa for a downtrend.

The Stochastic Oscillator contains two lines which are plotted below the price chart and are known as the %K and %D lines. Like the RSI, the Stochastic is a banded oscillator so the %K and %D lines fluctuate between zero and 100, and has lines plotted at 20 and 80 which represent the high and low ends of the range.

Whatever charting package you use will calculate the lines for you automatically but you should know that the data points which form the %K line are basically a representation of where the market has closed for each period in relation to the trading range for the 14 periods used in the indicator. In simple terms it is a measure of momentum in the market.

The %D line is very simply a 5 period simple moving average of the %K line. Lastly you should know that you can change the inputs for the indicator and use for example a 3 period moving average of the %K line to get faster signals, however as this is an introduction to the indicator and because most traders I know do not change the standard inputs, I do not recommend changing them at this point.

Like the RSI the first way that traders use the stochastic oscillator is to identify overbought and oversold levels in the market. When the lines that make up the indicator are above 80 this represents a market that is potentially overbought and when they are below 20 this represents a market that is potentially oversold. The developer of the indicator George Lane recommended waiting for the %K line to trade back below or above the 80 or 20 line as this gives a better signal that the momentum in the market is reversing.

The second way that traders use this indicator to generate signals is by watching for a crossover of the %K line and the %D line. When the faster %K line crosses the slower %D line this is a sign that the market may be heading up and when the %K line crosses below the %D line this is a sign that the market may be heading down. As with the RSI however this strategy results in many false signals so most traders will use this strategy only in conjunction with others for confirmation.

The third way that traders will use this indicator is to watch for divergences where the Stochastic trends in the opposite direction of price. As with the RSI this is an indication that the momentum in the market is waning and a reversal may be in the making. For further confirmation many traders will wait for the cross below the 80 or above the 20 line before entering a trade on divergence.

As the RSI and Stochastic are similar in nature many traders will use them in conjunction with one another to confirm signals.

That's our lesson for today. You should now have a good understanding of the Stochastic Oscillator and some of the different ways that traders use this in their trading. In tomorrow's lesson we are going to look at an indicator which allows us to gauge the volatility of a financial instrument over a given time called Bollinger Bands.

Video: How to Trade Stochastics Like the Pro’s Do

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28 Responses to How to Trade Stochastics Like the Pro’s Do

  1. Thomas Otieno November 30, -0001 at 12:00 am #

    i love it,

  2. Chua Wen Zhen November 30, -0001 at 12:00 am #

    Hi, I am keen on learning how to trade. How would you recommend that I
    start? are there any good books/videos I can start with.

    • Mrslykid1992 November 30, -0001 at 12:00 am #

      +Chua Wen Zhen When I start, I got a demo account and bought a book based
      on a FXCM broker. Then I started implementing and working with the charts
      with the indicators. After, I kept a journal of my success and failures.
      Everyone is different. I’m a scalper, meaning that I place a position every
      5 mins or so. You might be a swinger or a day trader. It all depends on
      your personality and strategy. Best book that you want to really get is
      Pitbull: lesson from Wallstreet.

    • Carolina Quiroga November 30, -0001 at 12:00 am #

      +Chua Wen Zhen babypips school on babypips.com.. it’s free

    • Reverend Tacos Guidos Mananeros November 30, -0001 at 12:00 am #

      +Chua Wen Zhen Hi you could try Technical analysis for dummies those dummy
      series are helpful for the bargainers there is also one on fundamental
      analysis & candle sticks for dummies.

  3. hong lee November 30, -0001 at 12:00 am #

    put your money in the account pick 3 indicators and start trading

    • Tim Jones November 30, -0001 at 12:00 am #

      +hong lee dude, you should TOTALLY trade weekly options, and put ALL of
      your money in one high beta stock three strikes out of the money!!!

    • jpcfourth November 30, -0001 at 12:00 am #

      sounds like a straight path to a blown account

  4. Rogue Gamer November 30, -0001 at 12:00 am #

    OMG, this is not a video to advertise your ideas. Please advertise
    somewhere else.

  5. zebalewski1 November 30, -0001 at 12:00 am #

    Here is EVERY THING you need to know about how the pros use stochastics:
    they dont!! 

    • Kevin Alves November 30, -0001 at 12:00 am #

      +Tony Cao dont believe his bs, look at his video’s even him use indicator
      even its a MACD , one thing you should know , everyone has their own style
      of trading , doesnt necesary mean your a pros doesnt use stoch , i know
      pros that making millions a month use stoch.

    • Tony Cao November 30, -0001 at 12:00 am #

      What do they use then?

  6. Nethertar November 30, -0001 at 12:00 am #

    I consider Stochastic pretty sweet.

    • Greg Thomas November 30, -0001 at 12:00 am #

      +Nethertar Question, is the stochastic more or less the same as looking at
      volume? Or should you use both?

  7. Phenom November 30, -0001 at 12:00 am #

    what a waste of time using indicators that are secondary. majority of
    trades executed in the market are from computer trading software that don’t
    use indicators. most of them use price action and volume with complicated
    formulas. Algos don’t use indicators, why should we ?

  8. ElysianState November 30, -0001 at 12:00 am #

    Thank you for the clear and concise explanation. Especially, appreciated
    you leaving hype and product sales at the door. I’m looking forward to
    watching more of your videos.

  9. Estevan Matheus November 30, -0001 at 12:00 am #

    Nice video!!Pretty good

  10. wan madi bin leman November 30, -0001 at 12:00 am #

    thanks… nice sharin..

  11. Sasquatch Bobby November 30, -0001 at 12:00 am #

    very confusing. Need to spend some more time my friend

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  19. Lost in Japan November 30, -0001 at 12:00 am #

    I don’t understand why people are using indicators!?!? People are so lazy
    now a days. You want to learn how to trade, learn price action trading.

    • Mrslykid1992 November 30, -0001 at 12:00 am #

      +Lost in Japan Price action is great to get a sense of what is the next
      move. However, I have seen one HF manager just trade from a multiple SMA
      and another just trading with 9 indicator. There are many ways to skin a
      cat. All depends on the individual.

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