The stochastic indicator, has been around for over half a century and still remains one of the most popular momentum indicators and if you learn how to use it correctly, you will be able to make some great swing trading profits – Let's look at the stochastic in more detail.

The Best Indicator for Swing Traders

One of the best tool for swing traders is the stochastic indicator. The stochastic indicator is a momentum oscillator, which can warn of strength, or weakness in the market and allows traders to check for divergence in momentum from price and time their trading signals more accurately. The logic of the stochastic is simple and based on the assumption, that when a market is rising, it will normally close near the high of the session and when a market falls, it will generally close near its lows.

The Calculation of the Stochastic

Developed by Dr. George Lane, the indicator is plotted as two lines called the %K, a fast line and the %D, a slow line

· %K line is more sensitive than %D

· %D line is a moving average of %K

· %D line gives the trader the timing of the trade

While this may sound complicated it's not, it’s actually very similar to the plotting of moving averages. For example, take %K as a fast moving average, and %D as a slow moving average and you will now get the general picture. The lines are plotted on a 1 to 100 scale. "Trigger" lines are normally drawn on the stochastic at the 80% and 20% levels and these levels, indicate when a market has become overbought or oversold.

Using the Stochastic for Timing Trading Signals

When the stochastic moves to overbought or oversold, swing traders will watch for the stochastic momentum to diverge from price, in order to execute trading signals. The signals are most reliable if you wait until the %K, and %D lines turn upward, below 5% before buying - and in reverse, above 95% before selling, there more extreme and can get the odds in your favour more – You simply wait for a turn up with bullish divergence in a bull market and a turn down in a bear market with bearish divergence and then you enter your trading signal.

For swing trading, look to trade the crossover confirmations.

For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line. Be wary of short-term crossovers that can generate false signals. The best crossover is when the %K line intersects, “after” the peak of the %D line (known as a right-hand crossover).

A Powerful Indicator for Bigger FX Profits

Don’t worry if the above is confusing, you can see the set ups at a glance on any popular chart service and always remember, you don't need to know how an internal combustion engine works to drive a car.

If you are looking at using a swing trading strategy, you can make money by just using simple support and resistance levels and the stochastic and make some great currency trading profits.