Stochastic Oscillator Guide

The Stochastic Oscillator is a momentum indicator that compares the current price to the high-low range of a given period. It is particularly popular among forex traders.

What Is The Stochastic?

The Stochastic consists of two lines: the %K line (the fast line) and the %D line (the slow line). The indicator oscillates between 0 and 100. Above 80, the market is overbought; below 20, it is oversold.

Trading Strategies

1. Crossover of %K and %D

When the fast %K line crosses the slow %D line from below to above in the oversold area, it is a buy signal. When it crosses from above to below in the overbought area, it is a sell signal.

2. Divergence

Just like with the RSI, you can spot divergence. If price makes new highs but the Stochastic does not, this can indicate a trend reversal.

3. Trend Filter

Do not use the Stochastic in a strong trend. In a strong uptrend, the Stochastic can stay above 80 for a long time.

Settings

The default setting is 14, 3, 3. For faster signals, you can use 5, 3, 3.

Stochastic vs RSI

Both indicators measure momentum, but they do it differently. The RSI measures the speed of price movements, while the Stochastic measures the position of price within the range.

Conclusion

The Stochastic Oscillator is a valuable tool, especially in range-bound markets. Combine it with other indicators for the best results.