Volatility and the Stochastic Oscillator

Forex Signals - Volatility and the Stochastic Oscillator: 

The current excessive intraday volatility can play havoc for the Forex Trader as the degree and velocity of the moves renders many technical indicators (forex signals) temporarily obsolete. A more reliable forex technical signal in the current whiplash conditions is the well known stochastic oscillator.

Stochastic Oscillator:

 Developed over sixty years ago, the Stochastic Oscillator is a momentum indicator that shows the current closing price relative to the high/low range of a defined period, the most common of which is 14 days.

In practical terms there are two lines that crossover each other to generate buy/sell signals and two ranges to indicate overbought or oversold. The overbought range which is above 80 and the oversold range which is 20 or below. When the faster moving line crosses the slower moving line in the excessive "oversold" or "overbought" regions" an upside or downside price movement is likely.

NOTE: In the example below the stochastic oscillator is in the overbought region with the faster moving line falling to cross below the slower moving line, suggesting downside price movement.

Practical Example using the Stochastic Oscillator in conjunction with supporting technical and fundamental analysis.

Owing to volatility, a lower margin size of 20,000 EURUSD (Margin AUD$274) was used to limit any possible excessive stop loss exit.

• The daily chart reveals that the price overnight rejected the down sloping resistance line (with a false breakout attempt) and ended with spinning top like candle.
• The price peak was also near the 61.8% Fibonacci retracement region.
• The daily stochastic oscillator as a Forex signal for a Forex trade entry shows potential for further downside price correction. (Similar to early and late July 2011)
• On a fundamental basis, the disappointing outcome stemming from the French/.German meeting from earlier in the week has yet to pervade the markets.
• It will take little to upset the market in light of the fragile growth in the region, as highlighted by the soft data this week.
  

Outcome: The short-term trade suggestion followed to produce a healthy profit near to the support area shown.

     Daily Chart of the EURUSD, 18th August 2011, 4pm Sydney Time.