Since the inception of the financial markets there has been a need to create formulas and now indicators that will make a certain indications when price did something the trade was looking out for.
The indicators have been misconceived for quite a long time and that is why there is this statistic of 90% or more of the traders are losing traders.
This is quite a massive failure estimate and there is something one can learn from this; before applying any indicator or any trading strategy study and understand it first otherwise you will not be very happy with the results.
The fact is the market is our mother and if we approach her with disrespect of any nature be it applying an indicator we do not know or use a concept we do not understand like any caring mother the market will correct you by taking some money from your account.
This being said then you can expect that many people know this and they will do everything to put in the work before getting their hands wet, but that is not so newbie traders keep on repeating the same mistake over and over again until they blow their accounts.
So, let us get to learn about one of the most commonly used indicators in the trading universe, the stochastics, this indicator has some history to it and learning about it will help you understand how to apply it well on your charts.
What is Stochastics RSI Indicator?
Back in the day when technical analysis was brought to our attention the world was introduced to Dr. George Lane who created the stochastics indicator in the late 1950s. This indicator is actually a mathematical formula that is based on two levels, the support and the resistance levels.
The indicator is used to calculate momentum, and that is why when plotted it oscillates between the levels stated. To bring things closer home stochastic means the current position of price in relation to the current price range over a period of time.
So, the stochastics formula is simply a mathematical formula that is used to indicate price levels where we might experience a turning point and thus a change in price. There is more about how the stochastics are supposed to be used, this is where many people falter and make their own conclusions on how to use the indicator.
Information on almost every indicator is available and if you are smart enough as a trader you will search for the information and study it to understand better how it is used. Like Dr. George Lane who created the stochastics.
He also outlined some rules and regulations on which other concepts in trading that could be coupled with this indicator to get the best outcome but something funny is that traders apply them with almost every concept and that is why there is a massive failure rate within the industry.
The indicator as stated by the creator suggested it worked very well within cycles, while using Fibonacci retracements and the Elliot Wave theory. So, when you couple the indicator with either of the concepts then you get yourself one beautiful outcome and a rather consistent one.
There are other things that you can also get from using the indicator, you can get the tops and bottoms and you can also get divergences that indicate a major change in the price direction.
How to Read The Stochastics Oscillator?
There are many ways to interpret what an indicators relaying if you understand how to use it very well but for the beginner trader it is important to stick to the basics and after understanding the basics you can follow up with more interpretations.
One of the most common ways of interpreting the stochastic is by sing the overbought and oversold reading, this is one of the easiest ways of getting information from this indicator. The reason is this information is visual and it is easy to pick it from the charts right away and thus make a decision coupled with other concepts.
The traders use the overbought and oversold reading by simply looking at the levels the market is overbought if it hits the 80 level of the stochastics or it holds above that level. When this happens the trader will start to look for signs of a price breakdown using chart patterns and exhaustion patterns in price.
Things like a drop in volume at these levels are clear tale tell signs that you may be experiencing the onset of a drop in prices.
For oversold conditions you can see the 20 level of the indicator hit or price holding below this level and when this happens you will be ready to look for patterns that may indicate rejection or a surge in volume to indicate the onset of higher prices.
The main trick hear is to watch the indicator as your alert tool but not as your be and all, one mistake beginner traders make is use the indicators as the only source of information and this may hurt their growth and more, so, their bank accounts.
The stochastics indicator may give you an overbought reading and the price maintains this level for a while since the buying pressure is still intact, so it is important to have a solid concept to tie into when using the stochastics or any other indicator.
How to Use The Combination of The MACD RSI Stochastic?
Many trader have learnt that combining indicators that measure different aspects of price behavior to create one robust system that will give you the require precision.
That is how the macd rsi stochastic came to be, the MACD is a trend indicator thus shows direction, the RSI is a volatility indicator which measures price explosivity and the stochastics is a momentum indicator thus price change.
When combine they form one of the best systems in the trading universe. You get direction, strength and the position of price and from that information you decide whether you buy or sell.