How to Use Stochastic Indicator in Forex Trading? FBS Broker

Stochastic Oscillator

Sagitta is not a “golden indicator” but more of a confirmation indicator of what prices might be suggesting. The concept is that while stocks can turn in one bar, it usually takes two bars or more to signal a turn. Uses ADX, RSI, Stochastic, MACD, and crossing EMAs (1,2, or 3). This strategy creator allows you to turn on or off these indicators and adjust the parameters for each indicator.

The described setting combinations are used most often. Maybe you will succeed and find a perfect combination for your stochastic strategy. The stochastic oscillator indicator was invented in 1950 by American stock analyst George Lane. The Client commits to make his own research and from external sources as well to make any investment. These are the indicator’s two lines that provide signals. %K is referred to as a fast line; %D line is a Simple Moving Average of the %K line.

How to use the Stochastic indicator to better time your entries

76.46% of retail investor accounts lose money when trading ᏟᖴᎠs with this provider. It’s also recommended to use the combined with other technical analysis tools, such as Moving Averages, Heiken Ashi, Alligator, etc. Overbought and oversold levels are useful for predicting trend reversals.

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 20. The indicator is both overbought AND strong when above 80.

Applying stochastic oscillator strategy in trading

The next step is to identify the last closing price on a reversal pattern. Still, there can be any other reversal combination of a classic candlestick analysis and Price Action. It’s essential to determine the technical indicator’s direction and its location in the area above or below 50%. In our case, the blue main %K line is in the chart’s upper zone and is moving down (the green oval). Here, the signals are a cross of %K and %D lines above 80% and below 20%. Later, we will talk about momentum indicator signals in detail.

Stochastic Oscillator

It makes sense to use the oscillator with other trend indicators. Let’s consider the most popular combinations using any type of stochastic oscillator with other tools, such as the stochastic RSI. There are no strict rules on what smooth settings to use with this momentum indicator, but it’s vital to consider their differences for successful trading experiments. The stochastic oscillator is a range-bound indicator that measures market momentum. It identifies the periods when the market is overbought and oversold. As a result, it provides perfect entry and exit points.

Indicators, Strategies and Libraries

That’s why we look for a point to open a short trade in overbought zones. The stochastic oscillator presents a potential entry point where the red oval is. As there is a crossover of the indicator lines above 80%, a short-term correction should end, and the downtrend will continue pushing the oversold levels lower. The strategy involves first identifying overbought and oversold levels using the stochastic oscillator. When the stochastic oscillator is above 80, it is considered overbought and when it is below 20, it is considered oversold.

Place 5, 3 and 3 as the %K, %D and Slowing settings, respectively. In our example, we see that the %K line (blue) crossed the %D line (orange) upwards in the oversold area. We can get confirmation of the upward movement from the Inverted Hammer candle (1). However, we see that the indicator hasn’t crossed the 20 level.

Learn How To Use The Stochastic Indicator Step By Step

Transaction signals are created when the %K crosses through a three-period moving average, which is called the %D. Apart from the 20 and 80 extreme levels, traders may also use the 30 and 70 levels at times. When trend-following indicators fail during sideways markets, the Stochastic Oscillator may produce timely signals. The Stochastic Oscillator (Stoch) normalizes price as
a percentage between 0 and 100. Normally two lines are plotted,
the %K line and a moving average of the %K which is called %D.

Stochastic Oscillator

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