The creator of the stochastic oscillator provided a beautifully simplified explanation of what the stochastic oscillator is. It measures the momentum of price, so think of it like a rocket going up. It cannot just turn and fall down in an instant. It slows down first, then dips its nose before the dive. What do we learn from this? Momentum change comes first before the change in direction, and that rule also applies in forex.
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Stochastic Indicator VS RSI
Both, the stochastic oscillator and RSI indicators, are momentum oscillators, meaning that they are both used to predict market trends. However, how they go about achieving that is the main reason why they are so different. Although the RSI indicator is more widely used among analysts and traders alike, both are excellent indicators.
RSI Simplified
RSI was developed by J. Welles Wilder Jr. It compares recent gains to recent losses in a market. The RSI indicator measures overbought and oversold conditions by looking at the velocity of the price movements. The RSI forex indicator is displayed as a line with a value from 0 to 100, with 50 being the midline point. If the RSI indicator crosses over 70, that indicates an overbought condition. If the number dips below 30, it is an oversold condition. The RSI indicator can also be used to identify the support and resistance zones, to identify potential trend reversal points, or to verify the signals coming from other indicators such as Bollinger bands forex or trendline trading.
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