Understanding the Stochastics Indicator for Forex & CFD trading

The stochastic oscillator, also known as the stochastic indicator, is a popular trading valuable indicator for predicting trend reversals. It also focuses on price momentum and can be used to identify overbought and oversold levels in shares, indices, currencies, and many other investment assets.

The stochastic oscillator measures the momentum of price movements. Momentum is the rate of acceleration in price movement. The idea behind the stochastic indicator is that the momentum of an asset's price will often change before the security's price movement changes direction. As a result, the indicator can be used to predict trend reversals.

The Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. The indicator can range from 0 to 100.

In an uptrend, the closing price tends to be near the high, and in a downtrend, it tends to be near the low. Momentum is slowing if the closing price moves away from the high or low. Stochastics work best in large trading ranges or slow-moving trends.

The difference between the Slow and Fast Stochastic Oscillator is the Slow %K incorporates a %K slowing period of 3 that controls the internal smoothing of %K. Setting the smoothing period to 1 is equivalent to plotting the Fast Stochastic Oscillator.

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