Trading with Stochastic indicator involves the following signals: Stochastic lines cross — indicates trend change. Stochastic forex indicator settings above 80 level — uptrend is running strong. Stochastic exiting 80 level downwards — expect a correction down or beginning of a downtrend. 20 — expect an upward correction or a beginning of an uptrend.
The main idea behind Stochastic indicator according to its developer, George Lane, lies in the fact that rising price tends to close near its previous highs, and falling price tends to close near its previous lows. Stochastic is plotted on the scale between 1 and 100. There are also so called “trigger levels” that are added to the Stochastic chart at 20 and 80 levels. Those lines suggest when the market is oversold or overbought once Stochastic lines pass over them. Let’s look at three methods of trading with Stochastic indicator. This is the simplest and common method of reading signals from Stochastic lines as they cross each other.
D line downwards traders open Sell orders. D line upwards traders open Buy orders. Traders may choose sensitivity of their Stochastics. The smaller the Stochastic parameters, the faster it will react to market changes, the more crossovers will be shown. But because it is too choppy it should be traded in combination with other indicators to filter out Stochastic signals.