The Stochastic indicator developed by George C. Lane at the end of the 1950s and is actively used among traders all over the world ever since. It evaluates the market’s momentum and compares the closing price to a price over a certain period of time. The idea behind the indicator is that in bullish market prices will close near the high, and in a bearish market prices close near the low.
The Stochastics can show when the asset you trade is overbought or oversold. It signals when the market’s momentum is slowing down. This, in turn, means that a change in trend is likely. As a result, the observation of the indicator may provide you with trade signals and ideas.
How to implement indicator
The Stochastics is included in the default set of MetaTrader. You can add it to the chart by clicking “Insert” – “Indicators” – “Oscillators” and then choosing “Stochastic Oscillator”.
The Stochastic Oscillator can be used on all timeframes. The default settings are 5, 3, 3. Other commonly used settings for Stochastics include 14, 3, 3 and 21, 5, 5. Stochastics is often referred to as Fast Stochastics with a setting of 5, 4, Slow Stochastics with a setting of 14, 3 and Full Stochastics with the settings of 14, 3, 3.
Fast Stochastics responds more quickly to the changes in the market price, while Slow Stochastics reduces the number of false crossovers and thus filters out some of the false signals. It’s up to you to choose the parameters you want.
How to trade using Stochastic
The Stochastic is measured in % from 0 to 100. The indicator is represented by 2 lines: the fast one, also called %K (solid green line) and the slow one, which is referred to as %D (red dashed line). Line %D is the moving average of %K.
These lines intersect when momentum changes. The signal is to buy when % K (green) crosses % D (red) from the bottom up. Sell when % K crosses % D top down.
Like any other indicator, the Stochastics doesn’t give the signals that are 100% profitable. There are 2 ways to make the signals of this indicator more precise:
1. Use the signals generated when the crossover happens in the extreme area (above 80 for sell signal and below 20 for buy signal).
2. Take into accountthe trend on a larger timeframe and trade in line with it. For example, if you use Stochastic on H1, check the trend on H4. If there’s a strong uptrend, don’t take the sell signals as the price may stay in the overbought area for extended periods of time. Instead, focus on the buy signals generated by Stochastics and you will have the benefits of trend trading.
In additions, as with other oscillators, pay attention to the situations when the Stochastic Oscillator is in divergence with the price chart. A sell signal occurs when the price makes a higher high but the Stochastic forms a lower high (bearish divergence). A buy signal appears when the new low of the price is not confirmed by the oscillator.
It’s also recommended to use the Stochastic Oscillator in combination with other tools of technical analysis, such as Moving Averages, Heiken Ashi, Alligator, etc.
Conclusion
The Stochastic Oscillator is a powerful tool of technical analysis. It has several purposes and can be the basis of a good trading system.
2024-05-24 • Updated
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FAQs
Use the signals generated when the crossover happens in the extreme area (above 80 for sell signal and below 20 for buy signal). 2. Take into account the trend on a larger timeframe and trade in line with it. For example, if you use Stochastic on H1, check the trend on H4.
How to trade forex with a stochastic indicator? ›
- If you want to enter a long trade, it is recommended to enter the market when the Stochastic line crosses above the level of 20.
- If you want to enter a short trade, it is recommended to enter the market when the Stochastic line crosses below the level of 80.
Stochastic 14 3 3 meaning: STOCH 14 3 3 is a range-bound oscillator consisting of two lines that move between 0 and 100. The first line (known as %K) displays the current close in relation to a user-defined period's high/low range. The second line (known as %D) is a simple moving average of the %K line.
How to use stochastic RSI in forex? ›
How To Use?
- Determine the time frame: The StochRSI can be applied to any time frame, from intraday to long-term charts. ...
- Calculate the StochRSI: The StochRSI is calculated by applying the Stochastic Oscillator formula to the Relative Strength Index (RSI).
- Interpret the readings: The StochRSI ranges from 0 to 1.
Some of the best technical indicators to pair with stochastic are moving average crossovers, moving average convergence divergence (MACD), and relative strength index (RSI).
How do day traders use stochastics? ›
In a basic overbought/oversold strategy, traders can use the stochastic indicator to identify trade exit and entry points. Generally, traders look to place a buy trade when an instrument is oversold. A buy signal is often given when the stochastic indicator has been below 20 and then rises above 20.
What are the best stochastic settings for forex? ›
The default settings are 5, 3, 3. Other commonly used settings for Stochastics include 14, 3, 3 and 21, 5, 5. Stochastics is often referred to as Fast Stochastics with a setting of 5, 4, Slow Stochastics with a setting of 14, 3 and Full Stochastics with the settings of 14, 3, 3.
What is the best time frame for stochastic indicator? ›
The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods. %D is a 3-day simple moving average of %K.
Is RSI or stochastic better? ›
Relative strength index was designed to measure the speed of price movements. The stochastic oscillator formula works best when the market is trading in consistent ranges. RSI is generally more useful in trending markets and stochastics are more useful in sideways or choppy markets.
What do k and d mean in stochastic? ›
For a stochastic oscillator, %K is the current price of the security, shown as a percentage of the difference between its highest and lowest point over the time the oscillator is being used. %D is a 3-day average of %K. This shows whether the current trend is continuing or changing.
To get better results when trading with a 1-minute chart, set the Stochastic oscillator's %K to 14 and both %D and slow %K to 3. This setup helps you see the real trends by filtering out the minor, misleading fluctuations that often happen in such a short time frame.
How to trade with MACD and stochastic together? ›
The Strategy
Preferably, you want the histogram value to already be or move higher than zero within two days of placing your trade. Also note the MACD must cross slightly after the stochastic, as the alternative could create a false indication of the price trend or place you in a sideways trend.
Which indicator is faster than RSI? ›
However, when it comes to identifying trend reversals, MACD may be a better option as it can provide earlier signals than RSI. This can be useful for traders looking to enter or exit positions at optimal times. It's important to note that no single indicator should be relied upon entirely when making trading decisions.
How to read a stochastic indicator? ›
The Stochastic indicator does not show oversold or overbought prices. It shows momentum. Generally, traders would say that a Stochastic over 80 suggests that the price is overbought and when the Stochastic is below 20, the price is considered oversold.
What is the formula for stochastic fast? ›
The Stochastic Fast Formula
Fast %K: [(Close – Low) / (High – Low)] x 100. Fast %D: Simple moving average of Fast K (usually 3-period moving average)
How accurate is stochastic indicator? ›
Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
Which indicator is better MACD or stochastic? ›
Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.
Are stochastic indicators accurate? ›
Key Takeaways
Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
Is stochastic good for scalping? ›
Scalping can be accomplished using a stochastic oscillator. The term stochastic relates to the point of the current price in relation to its range over a recent period of time. By comparing the price of a security to its recent range, a stochastic attempts to provide potential turning points.
What is the best time frame to trade stochastic oscillator? ›
The stochastic oscillator is included in most charting tools and can be easily employed in practice. The standard time period used is 14 days, though this can be adjusted to meet specific analytical needs.
