Page 62 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

STOCHASTIC
Like the Relative Strength Index (RSI), stochastic is another popular oscillator to gauge price
momentum and judge the age of a price move. Stochastic is not a new oscillator. The idea was
originated by a Czechoslovakian and perfected by Dr. George Lane, editor and publisher of
Investment Educators in Skokie, Illinois.

But unlike the RSI, which measures momentum based on the changes in daily settlement prices,
stochastic has two lines and the calculations are based on the rate of change in the daily high,
low, and close. The concept for stochastic is based on the tendency that as prices move higher,
the daily closes will be closer to the high of the daily range. The reverse is true in downtrends.

As prices decrease, the daily closes tend to accumulate closer to the lows of the daily trading
range. This concept also holds true on daily, weekly and monthly charts.

Stochastic can be calculated for any time period. Choosing the right time period for the stochastic
is similar to choosing the right number of days for a moving average. In effect, stochastic is a
trend-following method since its lines will cross after tops and bottoms have been made.
Choosing too short a time period will make the stochastic so sensitive that it becomes virtually
worthless. If the time period is too long, it is too slow to turn and too insensitive to be useful.

STOCHASTIC SIGNALS

Both bearish and bullish divergence is shown on the accompanying S&P chart. There's bearish
divergence in late February when S&P prices make a new high but the %D line stays far below its
winter high. This divergence accurately warned that a top was forming. An equally good signal of

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