Stochastic Slow – “Momentum will always change before price and this indicator shows that.” Stochastics is a momentum oscillator that does not follow price, it does not follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price. Price in comparison to a rocket speeding away from the Earth. Before the rocket can turn and head back to the ground again, it must first start to slow down.
The slowdown of momentum happens before the change of direction always. That is what stochastics, do it’s a leading indicator to the change in direction and helps predict the direction of movement.
In simple terms, George Lane’s stochastic oscillator measures the current currency price compared to its historical moving average price for a given time period. This study is one of the most commonly followed indicators in the FX market. It measures the degree by which a currency is overbought or oversold. The scale for the indicator is 0 to 100. Readings above 80 indicate overbought conditions and reflect the fact that the currency is strong and the price is closing near the high of the trading range. Readings below 20 indicate oversold conditions and reflect the fact that the currency is weak and is closing near the low of the trading range.
Trade Signal: Is when the two lines cross over 80 or under 20, which is best identifiable with daily and weekly charts for trend reversal. There must be a clear break out, and the further the distance between current price and moving average price, the greater the momentum. Stochastics are most useful in measuring the strength of a trend or as a coming reversal in prices. Many traders find that the best trading opportunity comes when their stochastic indicator is flattening out or moving in the opposite direction of prices. When these divergences occur, it’s time to book profits and/or to establish a position in the opposite direction of the prior trend.