Traders who choose to participate in the foreign currency exchange (forex) market enjoy many advantages over investors in other platforms. One of the most interesting aspects of forex trading is that this is a truly democratic market, which means that participants vary from sovereign central banks to interbank players and from institutional investors to individual traders.
Although the forex market presents a greater diversity of participants, this does not mean that they all have the same motivations or that they employ the same strategies. For individual forex traders who rely on online brokerage platforms such as AlfaTrade, the stochastic oscillator strategy is among the most sensible.
Technical Analysis and Forex Trading
The modern structure of the forex market has developed into a system that allows individual traders to take positions in the most liquid and dynamic financial exchange in the world.
Unlike Wall Street, the forex market is not ruled by opening bells or by regulators who suspend trading when they notice excessive sell-off behavior or suspicious transactions. There’s a certain level of self-regulation that emanates from the presence of sovereign central banks at the top tiers of participation. With this in mind, it is important to note that not all forex market participants behave in the same manner.
Central banks and interbank players are not concerned with making pips; their motivation is to control their respective currencies, manage the national money supply and maintain their economies competitive on a global level. For this reason, the forex activity of central banks is overwhelmingly fundamental.
Individual forex traders cannot expect to derive profits by mirroring the actions of central banks. While it is important to understand fundamental analysis for the purpose of demystifying the complexity of the forex market, individual traders are better served by technical analysis and the application of strategies such as following stochastic oscillator signals.
Forex Trading Signals
The reason technical analysis is better suited for individual forex traders is that this is a methodology that estimates certain trends based on previous reactions. Forex technical analysis is based on the correct assumption that individual traders cannot influence the actions of major participants such as central banks; however, the reaction by investors can be gauged and compared to previously similar situations.
In essence, while the forex market itself is unpredictable, technical analysis looks at previous behavior of traders; after all, they are creatures of habit just like all humans. Technical analysis relies on indicators and signals such as the stochastic oscillator, which is simpler than what its name suggests.
The stochastic oscillator indicator was created in the 1950s by a respected futures trader who noted that shifts in the pricing of securities were always preceded by a change in momentum. When observed in futures trading, for example, the stochastic oscillator shows that the loss of momentum that happens at the end of a slow trading session takes place right before the lowest index prices are posted.
In forex trading, the stochastic oscillator can be applied to profit from currency pairs that are going through a period of being oversold or overbought. Individual traders can take advantage of the trading signals offered by retail platforms such as AlfaTrade, which includes the stochastic oscillator.
Although the stochastic oscillator can be applied to just about any currency pair, it is important to remember that this indicator favors overbought and oversold pairs such as EUR/USD, and it tends to perform better for traders who watch the market on a long-term basis.
The forex trading signals associated with the stochastic oscillator tend to be market pullbacks, which means that they are generally safer than other signals since they correlate with stop-loss features.
Applying the Stochastic Oscillator Strategy
Forex traders can easily follow the stochastic readings on currency pairs thanks to the long trading sessions that last from Sunday to Friday evening in New York. This indicator is given a value from 0 to 100; the signals are issued when they reach 80 and above or 20 and below. A stochastic signal for EUR/USD at 80 indicates overbought behavior; a signal issued at 20 indicates that traders are in a reactionary sell-off mood.
In general, forex traders can enter the market with a buy position if they notice that the stochastic oscillator shows an oversold market that has lasted a few days. Conversely, a signal that indicates an overbought market may present a good opportunity for traders as they watch the price drop.
It is important to note that forex traders should only apply strategies such as the stochastic oscillator after they have established money management features such as stop-loss trades.
A good exercise for traders who are getting started with the stochastic oscillator is to keep an eye on the news as the signals appear; the idea is to find justification for the way traders are behaving at the moment.