{"id":293153,"date":"2019-11-19T11:27:04","date_gmt":"2019-11-19T00:27:04","guid":{"rendered":"https:\/\/www.gomarketingteam.com\/articles\/the-stochastic-as-an-alternative-to-rsi-relative-strength-index-for-trading-decision-making\/"},"modified":"2021-02-19T12:20:40","modified_gmt":"2021-02-19T01:20:40","slug":"the-stochastic-as-an-alternative-to-rsi-relative-strength-index-for-trading-decision-making","status":"publish","type":"post","link":"https:\/\/www.gomarkets.com\/en\/articles\/trading-strategies\/the-stochastic-as-an-alternative-to-rsi-relative-strength-index-for-trading-decision-making\/","title":{"rendered":"The Stochastic as an Alternative to RSI (Relative Strength Index) for Trading Decision Making"},"content":{"rendered":"

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Ideally, as traders, our aim is often to identify potential entries at the start of a new trend (so \u201cfirst in the queue\u201d) and exit at the end of that trend. Of course, we often will identify a price move where a trend may already be established and are therefore faced with the decision as to \u201cjoin in\u201d mid-trend (we hope) with the aim of catching the rest of a trend move.<\/p>\n

The concern of this approach is of course the fear of potentially entering just prior to that trend changing. There are \u201cclues\u201d we can use, such as candle body\/wick size and volume which may help, but also there is a group of indicators termed \u2018oscillators\u2019 which work on the idea that there are points in a price move which the underlying asset (be it a Forex pair or CFD) may be overbought (and hence a long trade could be deemed riskier), and oversold (where a short trade may be termed riskier).<\/p>\n

Although the Relative Strength Index (RSI) which we covered previous in an article (review “Adding the RSI to your entry or exit trading plan?<\/a>“), is possibly a more commonly used oscillator for determining oversold and overbought situations, the stochastic although possibly seen as being slightly more complex, does appear to be frequently used by more experienced traders.<\/p>\n

This article aims to shed some light on how this indicator is used and what it may be showing you relative to price movement.<\/p>\n

What is the stochastic trying to tell us?<\/strong><\/p>\n

As with the RSI the Stochastic is an oscillator (whose value can theoretically lie between 0-100) which has identified key levels which may indicate whether a particular asset is overbought or oversold. A move into either of these two \u201czones\u201d may suggest a trend change is more likely to be imminent.<\/p>\n

The key levels are below 20 (oversold) and above 80 (overbought).<\/p>\n

See below a 30-minute chart for GBP\/USD with the stochastic added using the default system settings (we have added horizontal lines from the drawing tools to make the key levels clearer.<\/p>\n

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We will discuss settings later and the additional line but at a simple level, taking the blue line on the stochastic if it moves below 20, then you would be cautious and perhaps avoid entering a short trade (examples A and B), and perhaps avoid entering a long trade if it moves above 80 (see example C).<\/p>\n

And the other dotted line?<\/strong>
\nThere are two lines that form the stochastic namely:<\/p>\n