Posted by forex at 2:40 AM
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1. Check whether the market is trending or in a trading range before looking at the stochastic indicator. Remember, it is more accurate if the market is ranging. If the price has been making continually higher highs and higher lows, it is trending upwards, and vice versa. If the price moves up and down within a set price band, it is in a trading range.
2. Select the slow stochastic on your chart. There are fast, slow and full stochastics, but the slow stochastic is the most popular, as it produces the fewest false signals.
3. Look to see if the stochastic signal line is above 80 or below 20. If it is over 80, it is likely that the shares or currency are overbought and likely to fall. If it is below 20, the opposite is probable.
4. Look to see which way the price is going on the chart. If it is going down, but the stochastic indicator line is going up, or vice versa, a bullish (rising market) or bearish (falling market) divergence is showing, meaning the trend will possibly change in that direction.
5. Now look at the current position of the MACD (Moving Average Convergence Divergence) indicator. Use the standard settings for the MACD. Point your cursor over each indicator line on the MACD; a box will tell you which is the MACD line and which is the signal line. When the MACD crosses up over the signal line it is a bullish indicator, and vice versa if it crosses down. A crossover above the zero line is more bullish than one below it; a negative crossover below the line is more bearish.
6. Also look for divergence between the MACD indicator and price direction as you did with the stochastic indicator.
7. Make the trade if the interpretation of the MACD and the stochastic oscillator matches, indicating a buy or a sell.