FOREX

There are advantages and disadvantages of trading with an oscillator. There are various kinds of oscillators, but they all serve to highlight one thing in the market:

Is the market overbought or is it oversold?

The oscillator will fluctuate between 0 and 100. We have chosen to demonstrate the principle of the oscillator using Stochastics. You can also use oscillators such as Williams % R (copy-cat of Stochastics), as well as RSI. You don't need to know all of them, or for that matter any of them, but when you start out on your trading, they can be a guiding light.

The Stochastics here has been set at 8-3-1, in order to show one line only. Normally Stochastics will display two lines. One is known as the fast Stochastics, and the other is known as the slow Stochastics. Traders are looking for the fast line to cross the slow line for a buy or sell signal. We have not shown that here for the sole reason I want to highlight the principle of the Stochastics Oscillator as clearly as possible.

The chart shows gold in a sideways range, followed by "price discovery" break to a new range...we have emphasized the range by the us e of two horizontal blue lines, which captures most of the trading over the course of 6 months. The oscillator's job is to highlight when a market is overbought or oversold, and look how well it is doing this on the chart. The red circles on the oscillator correspond to tops in the market. The same can be said for the green circles which catch the lows in the market so well.

Be aware that you can notice how quick an Oscillator like Stochastics can mess with your trading performance during trending markets. The vert ical blue lines on the chart zooms in on how quick the Stochastics goes into "oversold" territory, and yet Gold continues to fall. As a matter of fact Gold turned "oversold" at $900, yet it continued to fall for another $150. That would have been a costly error to buy.

Conclusion:

The Stochastics Oscillator is a miracle in a range bound market, but when the markets trend, you throw away that Oscillator. It will lose you money, and you will disrespect the trend, which is NEVER a good idea.

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