Table of Contents
Forex - Indicators - Stochastic
Stochastic is designating a process having an infinite progression of jointly distributed random variables.
The Stochastic Oscillator Technical Indicator compares where a security’s price closed relative to its price range over a given time period.
The Stochastic Oscillator is displayed as two lines.
- The main line is called “%K.”
- The second line, called “%D,” is a moving average of %K.
The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.
There are several ways to interpret a Stochastic Oscillator. Three popular methods include:
- Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level.
- Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level.
- Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.
- Look for divergences. For example, where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs.
How to use
This is confirmation indicator and acts as a filter, or confirmation for some other signal, and filter to filter false signals.
NOTE: The main signals (from some other indicators) may not come in simultaneously with the Stochastic.
- For this reason, it is important to check different possible signals from the Stochastic indicator to use it for trading, such as
- Fast Stochastic: 34/5/5
- Medium Stochastic: 55/8/8
- Slow Stochastic: 100/8/8
- and potentially use rules such as this for a buy:
- Slow Stochastic (main line) on bar #1 is below 20.
- Fast Stochastic on bar #1 is below 50.
- Medium Stochastic on bar #2 is below 20.
- Medium Stochastic on bar #1 is above 20.
- Medium Stochastic main line on bar #1 is above Medium Stochastic signal line on same bar #1.
- Medium Stochastic main line on bar 2 < Medium Stochastic main line bar #1.
- and the opposite for a sell.
Thus, the most usual rules/signals (most usually used) for this indicator are the following:
- main line of indicator is above or below some level indicating overbought/oversold.
or
- main and signal lines are started to move to our direction.
or
- main line of indicator is above or below 50.
The main line is above some level (50%, 70% or 80%):
- as a confirmation for sell trade - for trend following system
- as a confirmation for buy trade - for breakout systems (breaking support/resistance levels)
The main line is below some level (50%, 30% or 20%):
- as a confirmation for buy trade - for trend following system
- as a confirmation for sell trade - for breakout systems (breaking support/resistance levels)