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§5.7 Stochastic indicator

The feature of this indicator is that it works badly when trend is strong (uptrend or downtrend). However, it yields good results within the so-called “channels” when a price is locked up in a certain corridor for a long time and moves stably. According to specialists, the market is in the state of the “corridor” about 20-30% of its own time. That’s why this indicator will be very useful to you.

How can one understand when the market stays within the corridor? You can use the MACD indicator we have just considered. It is useful when you need to understand what trends exist in the market now. If the vertical little lines of the MACD are very short and are plotted from one side to the other, of the central line, then it means that market is in the corridor and you can put Stochastic to use.

The principle of Stochastic is based on

The principle of Stochastic is based on the fact that the closer the market approaches the top of the corridor the more likely a price will begin to decline. The closer the object gets to the ceiling the more chance there is that it will start to move down. The price will move easily move upward from the bottom. Use of the indicator is based on this principle.The indicator is similar to moving averages which are two lines of different colors. When the main line crosses above a dotted line it indicates that the market is close to the lowest point. So you need to place bets for a rise in prices. If it crosses below then the market is “overbought”. It has reached its ceiling, so the price will more than likely go down.If you use this indicator then you should not forget to look at the chart to detect any new powerful trend because as soon as a price moves out of the “corridor” the indicator’s readings may be no longer valid.

§5.8 Alligator indicator→