Forex Indicators_2. Forex RSI Stochastic Oscillator

Lesson 2: Forex RSI Stochastic Oscillator

The stochastic oscillator is a momentum indicator. Similar to the RSI, this indicator
measures overbought and oversold conditions in the market. Typically, a reading
above 80 level shows overbought conditions in the market, and below 20, oversold
conditions.

The indicator consists of two lines: The K line compares the latest closing price to
the recent trading range. The D-line is a signal line calculated by averaging the K line
values.
How can this be used to trade? Option One: Using the oversold and overbought
readings in a range bound market. In a range, we buy when the D-line is rising out
of the overbought area and we sell when the D-line is coming out of the oversold
area.
Option Two: Using the line crossovers in a range bound market. In a range, we buy
when the K-line crosses above the D-line and we sell when the K-line crosses below
the D-line.
Option Three: Using the oversold and overbought conditions in a trending market.
When the market is trending upwards, wait for a retracement lower and an oversold
reading on the stochastic indicator. You buy when the D-line is rising above the 20
level.

When the market is trending down, wait for a retracement higher and an overbought
reading on the stochastic indicator. Sell when the D-line is falling below the 80 level.
Remember, always stay with the trend.

When the market is in an up-trend, look only at buying opportunities and when the
market is in a down-trend, look only for selling opportunities.