subject: Stochastics Is The Best Indicator For A Non Trending Market [print this page] Many trades fall victim to the analysis paralysis syndrome. You don't need to use too many indicators in your trading. Mastering Stochastics and the Moving Average Convergence Divergence (MACD) is enough for you.
Why I say these two indicatos 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.
Now for a trending market condition, MACD ( Moving Average Convergence Divergence) is the best indicator. On the other hand for a consolidating market or a range bound market, stochastics is the best!
Some traders try to overate the MACD. No indicator is the holy grail in trading. Market conditions keep on changing so does people's perceptions on a value of an indicator. Now, stochastics may be more useful as compared to MACD under certain market conditions.
Stochastics is also known as a Momentum Indicator. This is a popular trading tool used to determine whether the market is in an overbought or an oversold condition.
Overbought means that the prices have advanced too far too soon and are due for a downside correction. On the other hand, oversold means that the prices have declined too far too soon and are due for an upside 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%.
Now the %K line is the faster line and will change direction as the %D line is just the moving average of the %K line. The general rule is the if the reading is over 80%, the market is overbought and ripe for a downside correction. And if the reading is below 20% on the chart, the market is oversold and ripe for bouncing down.
