The stochastic indicator is a two-line indicator that can be applied to any chart. It fluctuates between 0 and 100. The indicator shows how the current price compares to the highest and lowest price levels over a predetermined past period. The previous period usually consists of 14 individual periods.
- A stochastic oscillator is a popular technical indicator for generating overbought and oversold signals.
- It is a popular momentum indicator, first developed in the 1950s.
- Stochastic oscillators tend to vary around some mean price level since they rely on an asset’s price history.
- Stochastic oscillators measure the momentum of an asset’s price to determine trends and predict reversals.
- Stochastic oscillators measure recent prices on a scale of 0 to 100, with measurements above 80 indicating that an asset is overbought and measurements below 20 indicating that it is oversold.
The Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. The indicator can range from 0 to 100.
The closing price tends to close near the high in an uptrend and near the low in a downtrend. If the closing price then slips away from the high or the low, then momentum is slowing. Stochastics are most effective in broad trading ranges or slow moving trends. Two lines are graphed, the fast oscillating %K and a moving average of %K, commonly referred to as %D.
The oscillator works on the following theory:
- During an uptrend, prices will remain equal to or above the previous closing price.
- During a downtrend, prices will likely remain equal to or below the previous closing price.
- Generally, the area above 80 indicates an overbought region, while the area below 20 is considered an oversold region. A sell signal is given when the oscillator is above the 80 level and then crosses back below 80. Conversely, a buy signal is given when the oscillator is below 20 and then crosses back above 20. 80 and 20 are the most common levels used but can be adjusted as needed.
- A crossover signal occurs when the two lines cross in the overbought or oversold region. A sell signal occurs when a decreasing %K line crosses below the %D line in the overbought region. Conversely, a buy signal occurs when an increasing %K line crosses above the %D line in the oversold region.
- Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price make a lower low, but the Stochastic Oscillator forms a higher low. This indicates less downward momentum that could foreshadow a bullish reversal. A bearish divergence forms when price makes a higher high, but the Stochastic Oscillator forms a lower high. This shows less upward momentum that could foreshadow a bearish reversal.
%K= 100[(C – L14) / H14 – L14)] Where: C = Latest Close L14 = Lowest low for the last 14 periods. H14 = Highest high for the same 14 periods
%D = simple moving average of %K (3 period simple moving average is the most common)
Where to contact us :
Website : www.forextrade1.co
Twitter : www.twitter.com/forextrade11
Telegram : telegram.me/ftrade1
Facebook : www.facebook.com/Forextrade01
Instagram : www.instagram.com/forextrade1
YouTube : www.youtube.com/ForexTrade1
Skype : forextrade01@outlook.com
Email ID : info.forextrade1@gmail.com
Discord : https://discord.gg/vEk98ZvrHP
LinkedIn : https://www.linkedin.com/company/forextrade11