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    Stochastics index tells you how to predict the price trend when market is overbought or oversold

    Abstract:Stochastics indicator is also known as KDJ index, it was created by George Lane and used in futures market at first. KDJ index uses two lines, %K and %D, on chart, and it reflects the strength of the price trend and the phenomenon of overbuying and overselling.
    what_is_Stochastic

      The KDJ index compares the correlation between the price range and the closing price (close) over a given period of time. The oscillation index is displayed by two lines. The main line is called the %K line. The second line is called the %D line, and its value is the moving average of the main line % K. % K is usually displayed as a solid curve, while the% D line is displayed as a dotted curve.

      

    image.png

      Its main theoretical basis is that when prices rise, the closing price tends to be close to the upper end of the day's price range; on the contrary, in the downward trend, the closing price tends to be close to the lower end of the day's price range. In most of the time the stock market and futures market tend to close at a high price when the upward trend has not yet reversed, but once it falls, the closing price is often on the low side. In the design, the random index takes full account of the random amplitude of price fluctuation and the calculation of medium-and short-term fluctuation. This makes its short-term market measurement function more accurate and effective than the moving average, and the indicator is also more sensitive than the strength index in the prediction of short-term overbought and oversold market. Therefore, this index is widely used by investors.

      How to use Stochastics indicator

      

      The value of the KDJ index ranges from 0 to 100, and the Stochastics line exceeds 70 (at the red dot line in the picture above), indicating that the market is overbought. When the Stochastics line is less than 30 (at the blue dot line), the market is oversold. According to rules, we buy when the market is oversold and sell when the market is overbought.

    image.png

      From the picture above, you will find that the KDJ index shows overbought conditions for quite a long time. Based on the above information, can you guess the trend of the price?

      If you say the price will fall, you are right! Because the market is overbought for a long time, a reversal is inevitable. This is the basic principle of KDJ index. A lot of traders use KDJ index in different ways. The main purpose of KDJ index is teaching us when is the best time to trade when most are overbuying or overselling in forex market currently.

    image.png

      The random concussion index has four parameters:

      % K period: this is the time period used in calculating the shock index.

      % K slow period: this value controls the inherent smoothness of% K. A parameter of 1 is regarded as a fast random oscillation index, and a parameter of 3 is regarded as a slow random index. The default is 3.

      % D period: the time period used when calculating the% K moving average.

      % D method: the method used in calculating% D (including simplicity, exponential, patency and weighting).

      Equation of% K:

      % K = 100* (LOSE-LOW (% K)) / (HIGH (% K)-LOW (% K).

      Note:

      CLOSE-closing price of the day;

      Minimum value of LOW (% K) -% K.

      Maximum value of HIGH (% K) -% K.

      According to the formula, we can calculate the moving average of% D:

      % D = SMA (% K, N).

      Note:

      N-time period used for calculation.

      SMA-simple moving average

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