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Stochastics:  closing above 20 and below 80

Stochastics: closing above 20 and below 80

Richard Krivo, Trading Instructor

Instructor's Response:

The Stochastics indicator gives its strong sell signal when the two moving averages that comprise Stochastics have first been above 80 and then close below the 80 level.  The strongest buying signal is given when the two moving averages have first been below 20 and then close above 20.

Ideally, we should use Stochastics (and any other indicator for that matter),only to take trades in the direction of the Daliy trend.  So if a trader determines that a pair is in an uptrend, they would then consult Stochastics to time their entry after Stochastics has been below 20 and then closed above the 20 level.  In a downtrend they would look for Stochastics to have been above 80 and then close below it for the signal to sell the pair.
See the chart below for an example of this...
chart 3 3 10 a
As far as the current candle closing goes,it would be important to wait for the candle to close in order to make the determination as to whether or not Stochastics did close above 20 or below 80.  For example, let's say that a trader is using a 1 hour chart.  When that 1 hour candle closes at the end of the hour, the trader can check Stochastics to see if the two moving averages were above 20 or below 80 after the close occured.  That will confirm that the indicator did indeed close above or below the requisite level.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.