Advanced

Section 8:

Stochastic Oscillator.

In this section, advanced forex training, you will be learning about an Oscillator called the ‘Stochastic’.

An Oscillator is an indicator or tool that traders use to help them determine the overbought and oversold points in the market (If there are too many buyers, or too many sellers). The stochastic oscillators you will be learning about is one of the most popular oscillators that traders utilize as they are 100’s at your disposal on the Khwezi platform, but we don’t want to use too many oscillators at the same time as this could lead to confusion.

Regardless of what oscillator you use in trading or how helpful it may seem; we do not trade purely based on using these alone as they are lagging – when the oscillator changes after price moves. We cannot rely on using one component of the market. You first need to analyze, and then use these tools to confirm your entry point.

There are important points you need to understand about this oscillator.

There is a fast-moving average (black) and a slow-moving average (red).
The two faint dotted lines on the top and the bottom show overbought / oversold regions (overbought is top, oversold is bottom). These are the 80 and 20 points.
Above the 80 means price has too many buyers, below the 20 means price has too many sellers.
These two lines track and follow the movement of price over a certain time period.

Rules for using the stochastic.

Based on the image above, you can see that the two lines follow the movement of the market, when the market is going up the two lines go up, when the market is going down the two lines go down.

The 80 and the 20 marks are very important as they show you if there are too many buyers or too many sellers in the market. A lot of traders make the mistake of purely using the stochastic to enter trades and this will not be profitable long term if you don’t follow price action or the important rules of using this oscillator.

When you are looking to BUY:

Make sure both of the lines are below the 20 mark.
Wait for the faster line (black) to cross / intersect the slower line (red).
Wait for both lines to point up in the direction of the 20 mark.
Confirm your entry.

When you are looking to SELL:

Make sure both of the lines are above the 80 mark.
Wait for the faster line (black) to cross / intersect the slower line (red).
Wait for both lines to point down in the direction of the 80 mark.
Confirm your entry.

If you look at the example above, you can see these rules as confirmation. We also know you are thinking, ‘If this works so well and shows the market direction, then I am just going to buy and sell using these rules and nothing else’. If you thought that and want to trade like that, it is very risky. We have made several points in this handbook to state that you should not be entering trades based on one aspect of the market… use them all together and be safe rather than sorry.

That concludes our section for the stochastic and what we can take from this is that the stochastic is a tool we use to gain a confirmation in the market, and we can utilize this to see where there are too many buyers / sellers in the market in order to confirm our analysis.

Section 9:

The MACD.

The MACD (Moving Average Convergence Divergence) is also an oscillator that traders use, and add to their charts, to help determine the strength of the overall direction of the market. The MACD and Stochastic are similar in a sense that they show the overall strength of the direction of the average market movements, but the MACD shows us more about the overall strength of the trend, whereas the stochastic shows us potential exhaustion of the trend (overbought / oversold).

Remember that we do not trade using these indicators without doing price action analysis first. These help us to confirm our analysis.

Above is an example of how the MACD works, see below for a more detailed explanation.

Rules for using the MACD.

We have three important points we refer to when using the MACD. We have the histogram bars (black bars), the moving average (red dotted line) and we have the mid-point (zero) where the bars change direction.

The histogram bars refer to the strength of every single candlestick that we see.
The moving average shows the average movement of price and its direction.
The mid-point tells us whether the market is stronger to the bullish side or the bearish side.

We use the MACD to help us confirm or ‘bias’ of the direction of the trend in the market, or the stronger direction. The bigger and longer the bars, the strong the market is (to the downside / upside). If the bars are above the mid-point, then the trend is getting strong going bullish, and if the bars are under the midpoint, we expect the trend to be stronger on the bearish side.