Stochastic Oscillator

Usage: Evaluating the Trend and Detecting Overbought/Oversold Markets

◙ Trading: Identifying Trend Reversal/Continuation | Trading Slope Divergences

Standard Settings: 14 Periods (14,3,3)

 

Introduction to the Stochastic Oscillator

Developed by George Lane, the 'Stochastic' is an oscillator that can measure the momentum and the speed of a price. It can be used as a tool for identifying trend reversals or trend continuation.

The Stochastic bound between 0 and 100 and it can identify overbought and oversold market levels as follows:

□ Overbought market levels are set at reading 80

□ Oversold market levels are set at reading 20

 

Calculating the Stochastic Oscillator

The Stochastic is formed by two lines

■ %K = {(Last Close - Lowest Low in K period)/(Highest High in K period - Lowest Low in K period)} * 100

Where,

K is the number of periods. Standard settings K=14 (14,3,3)

 

Trading with the Stochastic Oscillator

The Stochastic can be used for:

  • Detecting Overbought/Oversold Markets
  • Identifying Trend Reversal/Continuation
  • Trading Slope Divergences
  • Generating Trade Signals

This is an example of 'Stochastic' trade signals:

  • A bullish trading signal occurs when the price forms a lower high but the stochastic forms a higher high
  • A bearish trading signal occurs when the price forms a higher low but the stochastic oscillator forms a lower low

 

 Platform Setup

You can install the 'Momentum' directly in MetaTrader-4 or MetaTrader-5:

□ GO TO → INDICATORS → OSCILLATORS → STOCHASTIC OSCILLATOR

□ SETTINGS → 14 PERIODS

 

Stochastic Oscillator

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