- PPF Points
- 2,039
When looking at the Stochastic Oscillator and the Relative Strength Index (RSI) in Forex trading, it is really important to understand that both the Stochastic and the RSI are momentum indicators which aim at helping traders to find overbought or oversold conditions but they are different in their approach and effectiveness.
The Stochastic Oscillator mainly compares with a currency pair's closing price its price range over a period and that helps the traders in finding spot reversals. It creates two lines: %K and %D, which move between 0 and 100. Most traders rely on the crossover of these lines as a potential buy or sell signal. When the crossing happens in the extreme areas (over 80 or under 20), the signal becomes stronger. The Stochastic is even more sensitive to the price and can give more frequent signals, thus potentially more volatile.
Conversely, RSI gauges the extent of recent price movements to decide if a market is overbought or oversold. Operating within a scale from zero to one hundred, the RSI usually employs 70/30 levels where overbought and oversold conditions are marked, respectively. The RSI indicator moves in a less choppy manner than the Stochastic and it can be used to validate the strength of a trend, it gives fewer but mostly more accurate signals, especially if it is combined with price action or other indicators.
Which one is better depends a lot on actual trading strategy, market volatility, and volume. The Stochastic could be more profitable in choppy markets. Using both indicators at the same time can give more broader insights about market volatility.
The Stochastic Oscillator mainly compares with a currency pair's closing price its price range over a period and that helps the traders in finding spot reversals. It creates two lines: %K and %D, which move between 0 and 100. Most traders rely on the crossover of these lines as a potential buy or sell signal. When the crossing happens in the extreme areas (over 80 or under 20), the signal becomes stronger. The Stochastic is even more sensitive to the price and can give more frequent signals, thus potentially more volatile.
Conversely, RSI gauges the extent of recent price movements to decide if a market is overbought or oversold. Operating within a scale from zero to one hundred, the RSI usually employs 70/30 levels where overbought and oversold conditions are marked, respectively. The RSI indicator moves in a less choppy manner than the Stochastic and it can be used to validate the strength of a trend, it gives fewer but mostly more accurate signals, especially if it is combined with price action or other indicators.
Which one is better depends a lot on actual trading strategy, market volatility, and volume. The Stochastic could be more profitable in choppy markets. Using both indicators at the same time can give more broader insights about market volatility.
