What Is The Slow Stochastic Oscillator?

stochastic indicator explained

Volume, support/resistance and breakouts can be used to confirm or refute signals produced by the Stochastic Oscillator. Chart 6 shows International Gaming Tech (IGT) with a bullish divergence in February-March 2010. Notice how the stock moved to a new low, but the Stochastic Oscillator formed a higher low. The second is a move above 50, which puts prices in the upper half of the Stochastic range. Notice how the Stochastic Oscillator moved above 50 in late March and remained above 50 until late May. Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator.

stochastic indicator explained

The stochastic readings are essentially percentage expressions of a security’s trading range over a given time period. (The default setting for the Stochastic Oscillator is 14 time periods – hourly, daily, etc.) A reading of 0 represents the lowest point of the trading range. A reading of 100 indicates the highest point during the designated time period. During volatile market conditions, where there are lots of price changes and quick reversals, this can happen quite regularly, resulting in several losing trades if acted upon.

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Of these, the scan then looks for stocks with a Stochastic Oscillator that turned down after an overbought reading (above 80). This scan starts with stocks that are trading above their 200-day moving average to focus on those that are in a bigger uptrend. Of these, the scan then looks for stocks with a Stochastic Oscillator that turned up from an oversold level (below 20).

  • However, in a strongly trending market the line may remain in this region for some time, so some traders consider the line moving back out of this zone as the confirmation of the end of a trend.
  • The stochastic oscillator is a valuable indicator for overbought and oversold conditions.
  • A subsequent move below 80 is needed to signal some sort of reversal or failure at resistance (red dotted lines).
  • The stochastic oscillator is especially useful among commonly day-traded assets such as low float stocks that have limited amounts of shares and are more volatile.
  • Therefore, it is best used along with other technical indicators, rather than as a standalone source of trading signals.

Such trading ranges are well suited for the Stochastic Oscillator. Dips below 20 warn of oversold conditions that could foreshadow a bounce. Moves above 80 warn of overbought conditions that could foreshadow a decline. Notice how the oscillator can move above 80 and remain above 80 (orange highlights).

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He indicates that the oscillator follows the speed or momentum of price. If you have data on the closing prices of a security, you can import that into Excel in order to compute %K. In particular, you would subtract the highest high https://www.bigshotrading.info/ observed in your lookback period from the last closing price and put this into the numerator of a fraction. In the denominator, you would take the difference between the highest high and lowest low prices over that same period.

Divergences are used to determine tops and bottoms of trends, and to decide on when to enter and exit a position. In this regard, divergences are a leading indicator of future price action. Although the stochastic indicator can be used in any financial market, it is especially popular stochastic indicator explained among Forex traders and this article will focus on the Forex market. A %K of 80 implies that the security’s price is above 80% of the price range (high – low) of last 14 days. The assumption here is that security’s price will remain at the top of the range in a strong uptrend.

Stochastic oscillator

Just because the Stochastic indicator is a leading indicator does not mean it is predictive as such. Sometimes the indicator suggests a certain price behaviour is imminent, but the price does not follow through. Traders who act on a false signal can obviously end up making an unprofitable trade. As with most technical analyses, skill in interpreting and understanding Stochastics indicator signals only comes with experience and must be developed over time. Everyone’s strategy is different but depending on the time settings chosen, traders may misperceive a sharp oscillation as a buy or sell signal, especially if it goes against the trend. Conversely, when both stochastics are below the oversold line (30 or 20) and the %K line crosses above the %K line, this could signify a time to exit a short position or initiate a new long position.

stochastic indicator explained

These helpful tips will remedy that fear and help unlock more potential. When the asset is oversold, the stochastic is below 20, while the RSI is below 30. When the asset is overbought, the stochastic is above 80, while the RSI is above 70. It’s worth remembering these rules to read the signals correctly. You don’t need to calculate the indicator manually as it’s automatically implemented and calculated on trading platforms – for instance, on the TickTrader platform. Still, it may be useful to know how the indicator is built so you understand which settings you can use for your strategy.

Stochastic Oscillator Explained

This signal is the first, and arguably the most important, trading signal Lane identified. Both are stochastic tools that are used to determine momentum in any given market condition. The stochastic oscillator is a more basic technical analysis tool and shows directional momentum based on the asset’s closing price. Some traders aim to lessen the Stochastic Oscillator’s tendency to generate false trading signals by using more extreme readings of the oscillator to indicate overbought/oversold conditions in a market. Rather than using readings above 80 as the demarcation line, they instead only interpret readings above 85 as indicating overbought conditions. On the bearish side, only readings of 15 and below are interpreted as signaling oversold conditions.

Forex traders prefer a slower version of this indicator because they believe the signals are more accurate. For Slow Stochastics, %K becomes the old %D line, and the new %D is derived from the new %K. The trader chooses the period, based on the type of trading being done and the period of time that needs to be studied. Once you have added the necessary data, software algorithms perform the computational work and produce a Stochastics indicator which is displayed on a chart. The stochastic oscillator is a ubiquitous technical indicator found in many trading platforms, online brokerages, and technical chart services with similar configurations.


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