Oscillators

Commodity Trading With Stochastic Oscillators

By Dave Rivera

The stochastic oscillator was developed in the late fifties by George Lane. It is an oscillator which shows momentum in a commodity by comparing the current day's close to the high/low ranges over a specified amount of days. Consistent closings near the higher side of the range indicates buying pressure while a close consistently on the lower side of the range indicates weakness and selling pressure. It shows whether a commodity is overbought or oversold. The calculation of the formula is as follows:

%K = (Recent Close-Lowest Low (n) / Highest High (n) -- Lowest Low (n)) x 100

%D = 3 period moving average of %K

And (n) = the number of periods used for calculations

Hence, a 20 day stochastic oscillator would take the most recent close, the highest high of the last 20 days as well as the lowest low of the last 20 days. The general time period used here is the 14 time period. These formulas are given here for clarification only. One rarely ever needs to calculate these values manually, as the software used for charting will automatically plot it straight on your commodities chart.

Stochastic Oscillator - How Do We Use It?

Essentially, Stochastic Oscillators have three types. Fast, full and slow. By default, most trading software tends to use the fast one. Here, the oscillator comprises of two lines. The first one is %K which measures the raw momentum of the commodity. As discussed earlier, %D is just a simple moving average of %K, but is still more important than %K. Generally, it is seen that the %K line is the faster line, and the %D line is the slower one. A trader needs to look out for %D line and price both moving to either overbought territory, or the oversold territory. One can sell the commodity when it moves above 80, and then crosses over to begin moving down again and buy when it reaches 20 and begins to move up again. The slow or full stochastic oscillators are smoother, as compared to the fast stochastic. However, it is important to remember that just because the oscillator shows that it is above 80 does not mean that it is overbought. It may well continue to trend upwards a long time after that.

Divergences

Sometimes, something unusual happens. There is sometimes a divergence between the prices and the stochastic oscillator. When prices are moving up the oscillator is showing that it is oversold, and vice versa. This tells us that the current trend is losing steam. So, if the commodity moves up, but the %D is going down, this would be a bearish sign. However, it must be noted that the signal is not considered a divergence till %K line moves across the %D line in a direction opposite to the price. One has to be careful with the stochastic oscillator as there are a lot of whipsaw possibilities. Divergence trades are best taken when the oscillator moves below 80 once, moves back up again, and gives a double top formation to move down again below 80.

It is not advised to use this oscillator by itself. It is always better to get verification from as many different indicators, but this indicator will give you a very good idea about the trend momentum of a commodity.

About the Author: David has traded futures & options for one of the largest cash trading firms in the world. He currently owns and runs the following websites: Futures Options Simulated trading & Futures Options

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Forex Market Timing - Using Momentum to Trade for Huge Profit Potential
By Kelly Price

If you want to get better market timing for your forex signals you need to understand price momentum and how it can get the odds in your favour. If you have not used momentum oscillators before, then its time to make them part of your forex education.

Confirmation

If you simply try and buy low sell high by selling into resistance and buying into support your making a fatal error - why?

Because you are predicting which is the same as hoping or guessing and you don't get rewarded for relying on hope in any venture, let alone forex trading.

Many novice forex traders think that to win they have to predict - but as we don't know the future, this is not going to help you make money, you simply don't have the odds on your side.

If you learn forex trading correctly, you will understand that you need to act on the reality of price, confirmed by momentum oscillators which are leading indicators and can confirm trend changes.

Let's look at the correct way to use momentum oscillators in your forex trading strategy, so you can enjoy currency trading success.

Momentum & Support and Resistance

For example, when a price gets near to support you don't just simply buy - you wait for confirmation that price velocity is turning away from the level, by using momentum oscillators.

You're not hoping or guessing - you're acting on the reality of price change.

We don't have time to go through momentum oscillators in detail here (there covered in our other articles) but two of the best are - RSI and the stochastic indicator.

Look them up - their easy to understand and use and all you need to do is watch for simple visual setups.

Momentum oscillators can also help you take advantage of some of the best moves which don't involve looking for support and resistance to hold but help you spot if it will break.

Momentum and Breakout Trading

If you want to catch the biggest moves with your forex trading system you need to trade breakouts.

The fact is the best market trends don't start from market lows - they take off from new market highs. Traders who sit back hoping for a lower entry point - end up just waiting as the trend accelerates and DOESN'T pullback.

Buying a new market high is difficult will it continue or do you get the worst possible entry point?

Momentum oscillators can help you decide.

If you have a breakout on your forex chart supported by rising momentum, chances are it will continue and you should go with the break. If momentum on the other hand is weak, it could be a failed breakout and should be avoided.

It's all about getting the odds on your side and that's what momentum oscillators help you do.

Momentum and the Odds

Momentum oscillators can help you time market entry better and also help you stay out of trades that don't have good odds. If you use momentum correctly, you will increase your odds of currency trading success.

So if you are trading forex keep in mind:

Don't rely on hoping guessing or predicting - rely on trading the reality of changes in price momentum and enjoy greater forex trading success.

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