Hello, everyone! We continue the rubric of indicators, today you will get acquainted with the no less famous oscillator type indicator – Stochastic Oscillator (Stochastic). Make sure you have selected a Top Forex Broker. I will be using my favorite broker Libertex
The Stochastic Oscillator indicator was invented over 50 years ago by George Lane and has not lost its popularity to this day. It has been used and is being used in the stock market, and with the advent of the Forex market, it has gained great popularity in it.
How Does the Stochastic Indicator Work?
The stochastic indicator measures the location of the current price movement relative to the price for a specific period in the past (which you set yourself in the settings). The measurement is in percentage. calculation formula
%K = (Close (t)-Low (i)-High (i)-Low (i)) x 100
Where Close (t) is the current closing price of the candle, High (i) is the maximum price for the selected period, and Low (i) is the minimum price for the period.
One of the most important advantages of the indicator is that it allows the trader to identify overbought and oversold places in the market .
Also, the calculation of the indicator is based on moving averages that are painfully familiar to us, and due to its popularity, of course, it is already in the mt4 terminal.
Let’s launch it. The settings window appears:
Let’s take a closer look at each indicator parameter:
Period %K-the number of periods used in the calculation (solid line by default) of the stochastic;
Period%D– is a moving average from%K, set in periods (the default is a dashed line);
Slowdown-smoothing %K moving average (the smaller the value, the faster the oscillator, false signals will appear often);
Prices—apply the calculation to the low/high (minimum/maximum) or close/close price;
At the link, you can learn more about the methods that will be used to calculate the moving average: simple, exponential, smoothed, or linearly weighted.
One of the important parameters of the indicator is the levels, with the help of which you can determine when the market is in the oversold or overbought zone. Click in the settings window on the levels:
The default is 20% and 80%.
If the stochastic is above the 80% level, then the market is in the overbought zone (increasing the probability of stopping growth), and if it is below 20%, it is in the oversold zone (increasing the probability of stopping the fall).
With a protracted uptrend, both levels move up by a few percent, and with a downtrend, they reduce the number of false signals.
Do not forget that you can change all the parameters. Use different settings on different timeframes and currency pairs. Look for your golden meaning!
How to trade with the stochastic indicator?
There are several trading methods using the Stochastic Oscillator indicator.
1. Buy if the %K line is below the 20% level and then rises above it. We sell if it is above 80% of the level, and then it falls below it.
2. Buy when the %K line crosses the %D line from below, and sell when it crosses the %K line from top to bottom.
To exclude (albeit not much) a lot of false signals, in the settings we set the value of 13 for the period %K.
3. Divergence: a divergence of the direction of movement of the stochastic from the price on the chart is the most significant (powerful) signal.
The disadvantages of the indicator
It often gives signals against an established trend (a counter-trend signal); the consequences can be disastrous. excessive dynamism during high price volatility, as a result of many false signals.
Important: Do not trust only one signal from the Stochastic Oscillator; combine it with other tools for analyzing your TS.
That’s all for me. If you want to know more, subscribe to the blog and you will be the first to know about the release of new articles.
