by George C. Lane, " The Stochastics Man" in the 1950s.|
The Stochastic Oscillator tracks market momentum and consists of two
oscillator lines, called %D and %K.
Popular types of Stochastic Oscillators are: Fast Stoch and Slow Stoch.
Two lines are calculated, called %K and %D.
%K compares the latest closing price to the recent trading range, ranging
from 0 when the latest close is a new N-day low, up to 100 for a new N-day
n = number of periods
%D is a 3-day simple moving average of %K
Overbought / Oversold levels
Oscillator readings below 20% are considered oversold.
Oscillator readings above 80% are considered overbought.
Popular trading signals from Stochastic Oscillator
- Buy when the Stoch Oscillator (either %K or %D or %K and %D) falls
below the oversold level (e.g., 20) and then rises back above that
- Sell when the Stoch Oscillator rises above the overbought level
(e.g., 80) and then falls back below that level.
Trending Versus Ranging Market Signals
In trending markets, take only signals in the main direction of the trend.
For an up-trending market, only look for oversold conditions, similarly,
for a down- trending market, only look for overbought conditions.
I. In trending markets
- In an up trending market, go LONG if %K or %D falls below the
oversold level and then start rising again;
- In a down trending market, go SHORT if %K or %D rises above the
overbought level and then start falling again.
II. In ranging markets
Positive and Negative Divergences between
price and Stochastic Oscillator
One of the most reliable signals to use the Stochastic Oscillator is to
wait for a positive or negative divergence to develop from overbought(80%)
or oversold levels(20%).
Sell Signal (see above example)
Once the Stoch Oscillator reaches overbought levels, for a SELL signal,
simply wait for a negative divergence to develop and then; a cross below
the 80% overbought level confirms the negative divergence, a SELL signal
is now generated.
Once the Stoch Oscillator reaches oversold levels, for a BUY signal, wait
for a positive divergence to develop after the Stoch indicator moves below
20% oversold level; after a positive divergence forms, a break above 20%
confirms the divergence and a BUY signal is generated.
Note: It is recommended to use the Stochastic
Oscillator in conjunction with other technical analysis tools to make a
complete forex trading system.
Forex Trading Stochastic Oscillator Indicator
The Forex trading stochastic indicator is an indicator that follows the
momentum of the market. The stochastic indicator is based on a simple
idea. During an uptrend, closing price tend to be high, while during
downtrends prices close low.
The Forex trading stochastic indicator warns about the presumed future
direction of the Forex trading currency price, based on the assumption the
when the currency price rises is closes near the high and when it drops it
closes near lows. This way the stochastic oscillator helps analyze a
certain trading pattern, whether it is an uptrend or a downtrend.
Using stochastic indicators does not require advanced calculations in most
Forex trading sites, since these are included and are done automatically
in the Forex Trading Software Online. The current closing price for the
stochastic indicator is shown in relation the previous prices over a
period of time.
This indicator has two lines:
* %K compares the current Forex trading closing price to the previous
* %D is a smoothing of %K that is seen as a signal line.
When the stochastic line is above 80%, an overbought signal is given, and
when it drops below 20%, the oversold signal is given.
This explanation tells you when to buy and sell using Forex trading
- Buy when the indicator falls below the line, and when it crosses the
bottom level up.
- Sell when the indicator rises above the line, and crosses the top
- Buy when the %K line crosses the %D line from below upwards, or from
Basically, the Forex trading stochastic indicator currency's closing
price to its price range over a given time period. The sensitivity of the
indicator can be lowered by adjusting the time period or by using a moving
average of the result.