The **Stochastic** oscillator is another technical indicator that helps traders determine where a trend might be ending.

The oscillator works on the following theory:

- During an
**uptrend**, prices will remain*equal to or above*the previous closing price. - During a
**downtrend,**prices will likely remain*equal to or below*the previous closing price.

This simple momentum oscillator was created by __ George Lane__ in the late 1950s.

* Stochastics measures the momentum of price. If you visualize a rocket going up in the air – before it can turn down, it must slow down. Momentum always changes direction before price. *

The Stochastic oscillator uses a scale to measure the degree of change between prices from one closing period to predict the **continuation of the current direction trend**.

The 2 lines are similar to the MACD lines in the sense that one line is faster than the other.

The Stochastic technical indicator tells us when the market is overbought or oversold. The Stochastic is scaled from **0 to 100**.

When the Stochastic lines are **above 80** (the red dotted line in the chart above), then it means the market is overbought.

When the Stochastic lines are **below 20** (the blue dotted line), then it means that the market is *possibly* oversold.

As a rule of thumb, we buy when the market is oversold, and we sell when the market is *possibly* overbought.

Looking at the currency chart above, you can see that the indicator has been showing overbought conditions for quite some time.

Based on this information, can you guess where the price might go?

If you said the price would drop, then you are absolutely correct! Because the market was overbought for such a long period of time, a reversal was bound to happen.

That is the basics of the Stochastic.

Many forex traders use the __Stochastic__ in different ways, but the main purpose of the indicator is to show us where the market conditions could be *possibly* overbought or oversold.

Keep in mind that ** Stochastic can remain above 80 or below 20 for long periods of time ** , so just because the indicator says “overbought” doesn’t mean you should blindly sell!

The same thing if you see “oversold”, it doesn’t mean you should automatically start buying!

**Don’t be a Stochastic Sheep!**

Over time, you will learn to use the Stochastic to fit your own personal trading style.

Okay, let’s move on to RSI.

Lesson 6: What is a Japanese Candlestick? Lesson 7 :Japanese Candlestick Anatomy Lesson 8:Basic Japanese Candlestick Patterns Lesson 9: Single Candlestick Patterns Lesson 10: Dual Candlestick Patterns Lesson 11: Triple Candlestick Patterns Lesson 12:Japanese Candlestick Cheat Sheet Lesson 13: Candlesticks with Support and Resistance Lesson 14: Common Mistakes That New Traders Make With Japanese Candlesticks Lesson 15: Summary: Japanese Candlesticks

Lesson 16 : Fibonacci Trading Lesson 17: How to Use Fibonacci Retracements Lesson 18: Fibonacci Retracements are NOT Foolproof Lesson 19: How to Use Fibonacci Retracement with Support and Resistance Lesson 20: How to Use Fibonacci Retracement with Trend Lines Lesson 21: How to Use Fibonacci Retracement with Japanese Candlesticks Lesson 22: How to Use Fibonacci Extensions to Know When to Take Profit Lesson 23: How to Use Fibonacci to Place Your Stop so You Lose Less Money Lesson 24: Summary: Fibonacci Trading

Lesson 25: What Are Moving Averages? Lesson 26: Simple Moving Average (SMA) Explained Lesson 27: Exponential Moving Average (EMA) Explained Lesson 28: Simple vs. Exponential Moving Averages Lesson 29: How to Use Moving Averages to Find the Trend Lesson 30: How to Use Moving Average Crossovers to Enter Trades Lesson 31: How to Use Moving Averages as Dynamic Support and Resistance Levels Lesson 32: How to Use Moving Average Envelopes Lesson 33: How to Analyze Trends With Moving Average Ribbons Lesson 34: How to Trend Trade with Guppy Multiple Moving Average (GMMA) Lesson 35: Summary: Using Moving Averages

Lesson 36: How to Use Bollinger Bands Lesson 38: How to Use the MACD Indicator Lesson 37: How to Use Keltner Channels Lesson 39: How to Use Parabolic SAR Lesson 40: How to Use the Stochastic Indicator Lesson 41: How to Use RSI (Relative Strength Index) Lesson 42: How to Use Williams %R (Williams Percent Range) Lesson 43: How to Use ADX (Average Directional Index) Lesson 44: Ichimoku Kinko Hyo Lesson 45: Trading with Multiple Chart Indicators Lesson 46: What is the Best Technical Indicator in Forex? Lesson 47: Summary: Popular Chart Indicators