Stochastic Oscillator: The Ultimate Guide

Hello, my friend! Let's talk about one great indicator, which is named Stochastic. It is a powerful analysis tool that you can use for trading purposes. Stochastic Oscillator is a heavyweight weapon that can shoot a star. It has great usability. Signals are easy to identify and interpret.

How it works

The indicator is designed to lead price movement. It shows market maximums, minimums and the last price between them within the calculated period. So, there are two curves:

• A slow %D line, which shows the average position of Stochastic in percents between the maximum (100%) and the minimum (0%)
• A fast line %K, which is a range of a current price in percents between a market high and a market low within the period.
• Upper limits indicate that the price is close to its maximum.
• Lower limits indicate that the price is close to its minimum.

How to turn on the indicator and set preferences

To find Stochastic preferences you should open the platform settings (click on the pencil icon near the asset name) and choose the “Indicators” tab.

Picture 1. Platform Settings

Then click on Stochastic Oscillator and set your own preferences or use defaults.

You can set up your Indicator's preferences using various parameters (Picture 2):

1) A %K period (fast line) shows how many price periods have been taken into account.

2) A %D period (slow line) is the main line of Stochastic.

Picture 2. Stochastic Oscillator settings window

3) “Slowing” is a period of averaging values of the indicator’s fast line. It is used for slowing the changing of values when the price begins to change rapidly.

4) “Overbought” shows the upper limit of the indicator’s chart between 80% and 100%.

5) “Oversold” shows the lower limit of the indicator’s chart between 20% and 0%.

Picture 3. Stochastic oscillator.

Signals

Stochastic Oscillator was developed for usage at markets where prices remain in certain corridors. Each indicator has two types of signals:

Type 1. Normal signal

• A buy signal. It indicates when the price moves to the “oversold” zone (between 0% and 20%) and the %K line crosses the %D line from the bottom upwards (It is possible to make a signal more clear if go by that %D won’t go far to the “oversold” zone).
• A sell signal. It indicates when the price moves to the “overbought” zone (between 80% and 100%) and %K crosses the %D line from the upside downwards (It is possible to make a signal more clear if go by that %D won’t go far to the “overbought” zone)

Picture 4. Stochastic Buy and Sell signals.

Type 2. Advanced signals

• A buy signal. The reason for buying here is a positive divergence of the asset and the Stochastic chart along with an additional effect of combined signals.
• A sell signal. The reason for selling here is a negative divergence of the asset and the Stochastic chart along with an additional effect of combined signals.

“Divergence” means a situation when the asset price and the indicators’ chart move to different directions (generally, to the opposite).

Picture 5. Positive Divergence of between Stochastic and Price graphs.

As we can see on the chart, the green line indicates positive divergence followed by the active upwards movement.

Here, the red line indicates negative divergence followed by a sharp falling.

For advanced strategies you can use Stochastic along with the following indicators:

• Parabolic SAR
• MA (Simple or Exponential moving averages)
• Bollinger Lines