How to Use the Stochastic Indicator


A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a lower low. Trader können auf hunderte Forex Indikatoren zurückgreifen. Think of it as the yard line in football. I assume that when the market reaches these levels, it is about to change its direction. Wir nutzen Cookies, um die bestmögliche Benutzererfahrung auf unserer Website sicherzustellen.

The Stochastics Rollercoaster


The Stochastics indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:. Software programs perform the necessary computational work and produce a Stochastics indicator as displayed by the two lines in the bottom portion of the following chart:. Forex traders prefer a slower version of this indicator because they believe the signals are more accurate.

The chart above is the slower version, a setting selection on the Metatrader platform. The weakness in the indicator is that it is difficult to discern how long in advance the signal truly is.

Stochastics values below 20 and over 80 are worthy of attention. The key points of reference are highpoints, lowpoints, divergences, and occasionally crossovers. Readings below 20 occur when a security is trading at the low end of its high-low range. Before looking at some chart examples, it is important to note that overbought readings are not necessarily bearish.

Securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure. It is, therefore, important to identify the bigger trend and trade in the direction of this trend.

Look for occasional oversold readings in an uptrend and ignore frequent overbought readings. Similarly, look for occasional overbought readings in a strong downtrend and ignore frequent oversold readings. Chart 3 shows Yahoo! A longer look-back period 20 days versus 14 and longer moving averages for smoothing 5 versus 3 produce a less sensitive oscillator with fewer signals.

Yahoo was trading between 14 and 18 from July until April 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. Similarly, the oscillator moved below 20 and sometimes remained below The indicator is both overbought AND strong when above A subsequent move below 80 is needed to signal some sort of reversal or failure at resistance red dotted lines.

Conversely, the oscillator is both oversold and weak when below A move above 20 is needed to show an actual upturn and successful support test green dotted lines. The Full Stochastic Oscillator 20,5,5 was used to identify oversold readings.

Overbought readings were ignored because the bigger trend was up. Trading in the direction of the bigger trend improves the odds.

Subsequent moves back above 20 signaled an upturn in prices green dotted line and continuation of the bigger uptrend. With a downtrend in force, the Full Stochastic Oscillator 10,3,3 was used to identify overbought readings to foreshadow a potential reversal. Oversold readings were ignored because of the bigger downtrend.

The shorter look-back period 10 versus 14 increases the sensitivity of the oscillator for more overbought readings. For reference, the Full Stochastic Oscillator 20,5,5 is also shown.

Notice that this less sensitive version did not become overbought in August, September, and October. It is sometimes necessary to increase sensitivity to generate signals. Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a higher low. This shows less downside momentum that could foreshadow a bullish reversal.

A bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a lower high. This shows less upside momentum that could foreshadow a bearish reversal. Once a divergence takes hold, chartists should look for a confirmation to signal an actual reversal.

A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline. Think of it as the yard line in football. The offense has a higher chance of scoring when it crosses the yard line.

The defense has an edge as long as it prevents the offense from crossing the yard line. A Stochastic Oscillator cross above 50 signals that prices are trading in the upper half of their high-low range for the given look-back period. You should really check out our amazing MACD Trend Following Strategy that we decided to share with our trading community only recently. It is similar to this Simple trading strategy of Stochastic indicator.

Here is a quick video of the strategy: When the histogram is below zero level, the currency is on a downtrend. A visual representation of the Swing Low pattern can be seen below: This can turn you into a keine einzahlung 60 sekunden binare optionen demo demokonto sniper elite trader because the Stochastic indicator will only make you pull the trigger at the right time. The multiple time frame concept is important because it can give you a more robust reading of the current price action and more it can help you better time your entry and exit points.

I assume that when the market reaches these levels, it is about to change its direction. The stochastic oscillator uses a quite complex mathematical formula to calculate the moving averages: The Slow Stochastic Indicator This indicator will help us with making a final confirmation of this trade and it will determine the exact point to enter it.

When crossover occurs on stochastic at the oversold area, then it gives buy signal.