What is stochastic in technical analysis

Stochastic indicator - a technical analysis tool

Technical indicators are mathematical and / or statistical calculations based on the available price, volume or time data.

The aim of this calculation method is to give a meaningful assessment of the likely future price movement - with the help of key figures.

Probably because a clear statement about the price movement cannot be made by any indicator.

The technical indicators of the chart analysis primarily serve to support or confirm one's own statement of a certain course direction and to minimize the probability of incorrect speculation.

The stochastic indicator in detail

The stochastic indicator shows the relative position of the closing price to the high or low price of a certain time unit.

On a daily basis this means: In the case of an upward trend, it is assumed that the daily closing prices are closer to the daily highs.

In the case of a downtrend, it is assumed that the closing prices are more oriented towards the lows.

The term stochastics, which in mathematics rather stands for probability or statistical calculations, seems to be factually wrong.

More on the topic in the video: Stochastic indicator

The practical application of the stochastic indicator

Like any indicator, the stochastic indicator is only useful in certain market phases when viewed in isolation.

Contrary to the assumption that it can confirm a trend, the stochastic indicator is mainly used in sideways markets.

It is quoted between 0 and 100.

A buy signal in a sideways market is generated when the indicator is below 30 and its movement is trending upwards. Here the market is then referred to as oversold.

It is important that the buy signal only arises when the indicator's chart crosses the 30 threshold upwards.

In the same way, a sell signal can be interpreted if the value of the indicator is above 80-90 and indicates a downward direction. Likewise, the sell signal is only generated as soon as the threshold of the overbought area is left.

Adapt indicators to his experience

As with other indicators, however, it is important to gain experience here too. Trade with a demo account from the most popular CFD providers. A wide variety of indicators are made available here to help you develop a sure instinct.

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Above all, use your own experience to adapt the indicator. The threshold of the oversold area can, for example, not be set at 30, but at 20.

When trading and working with indicators, your own experience is very important. Less useful is the help of other traders who have built up a construct of indicators and sell this as a recipe for success.

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