The Stochastics indicator measures the relationship between an asset’s closing price and its price range during a particular period since the closing price of the asset would likely stay at the higher end of a day’s range during an uptrend.

Similarly, it would be near the low during a downtrend.

Keeping this principle in mind, the Stochastics indicator measures if the asset price has been trending, losing momentum, or simply trading in a range.

Any experienced trader can figure out a market’s directional movement just by looking at a chart. However, the Stochastics oscillator makes it much easier to interpret the price action.

The Stochastics oscillates between two fixed values, 0 and 100.

When it trades above the 80 level, some traders believe that it indicates that the bullish trend is likely to lose momentum. However, a look into the Stochastic formula confirms that a high Stochastic shows, in fact, a likely continuation.

So, the best way to find a market entry with the Stochastics indicator is looking for long entries after a temporary bearish retracement during an uptrend and a short entry after a bullish retracement during a downtrend. It may sound too complicated at first. Especially, if you are new to technical analysis and have little experience with trading divergences. But let’s take a look at an example and you will realize it is a rather straightforward concept to grasp.

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