Stochastics is the Best Indicator For a Non Trending Market

New traders often ask how many indicators do you suggest using at one time? You don’t need to fall victim to analysis paralysis. You should master only these two oscillators the Stochastics and the MACD (Moving Average Convergence Divergence).

Why I say these two indicators are the best for you. Let me explain. Trending conditions in the market exist not more than 30-40% of the time. Rest of the time, the market is range bound or what you call consolidating. After a nice trending move, the market will move in a consolidation phase.

In choppy range bound market conditions, Stochastics is your best friend. And in a trending market conditions Moving Average Convergence Divergence (MACD) will give you solid trading signals.

Now, the myth that MACD is the best indicator out there may not be true. The reason being market conditions change and the people’s perception on an indicator’s given value. There is no holy grail in trading. Under certain market conditions, Stochastics maybe more useful as compared to MACD.

Stochastics is used to determine whether the market is overbought or oversold. The market is overbought when it reaches the resistance and it is oversold when it reaches the support. So when you are trading a range, stochastics is the best indicator to tell you when it is overbought or oversold. It is also called a Momentum Indicator!

Now a market is oversold when the prices have declined too far too soon. What this means is that the market is ripe for a bounce. In the same way, a market is overbought when it advances too far too soon. What this means is that it is ripe for a downward correction.

Stochastics used a mathematical formula that sows the location of the current close as compared to the high/low of the range over a certain period of time. Closing prices near the top of the range show that buying pressure and closing price near the bottom of the range show selling pressure.

Stochastics indicator has got two lines known as %K and %D. Both these lines are plotted on the horizontal axis for a given time period. The vertical axis is plotted on a scale from 0% to 100%.

The general rule in trading with the Stochastics is that when the reading is above 80%, it means that the market is overbought and is ripe for a downward correction. Similarly when the reading is below 20%, it means that the market is oversold and is going to bounce down soon!

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