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How to use stochastic oscillator

Stochastic Oscillator: Guide for Using Indicator & Best Settings,Categories

28/06/ · Traders use the stochastic oscillator to help identify when a particular stock is over- or under-valued and when might be a good time to buy or sell. There are many 30/08/ · Once the stochastic oscillator crosses down through the signal line, watch for price to follow suit. Though these combined signals are a strong indicator of impending We use a stochastic oscillator to find the entry levels. The recommended settings are: Periods: 14, 3, and 3; and; Levels: 90% and 10%. Conditions for a long trade: There is a long-term Add 20 EMA for filtering the signals given by stochastic indicator. Use stochastic overbought and oversold condition to generate buy and sell signals. The crossover point of %k (Fast) with Momentum always changes direction before price. The Stochastic oscillator uses a scale to measure the degree of change between prices from one closing period to predict the ... read more

It combines the aforementioned tool with momentum, which provides smoother signals and is less dependent on market noise. In SMI, curves are built around a zero line and move in either a positive or negative direction.

One of the curves is called smoothed or fast; another one is short-term. As you can guess, these lines differ by period. Still, even in such a case, it's worth using the SMI with other technical tools.

As for the directional movement, the SMI provides plenty of fake signals. You can download the Stochastic Momentum Index here. The standard installation process is via MetaTrader4. For beginner traders, check the step-by-step explanation using the example of the Bollinger Bands indicator here. If both the main and signal curves the green and red lines on the chart above are above the zero line blue , the market is overbought; if below, the market is oversold.

On the chart above, the red arrow marks this moment. If the stochastic indicator breaks the signal line bottom-up green arrow , open a long position. A stop-loss can be placed slightly below local minimums within several candles from the entry point. Close the position at either a take profit level, which is times bigger than stop-loss, or when a reversal signal occurs.

On the chart, the bar with which we calculate the stochastic indicator is marked with green. The close price is 1, The green line highlights the highest price for the last three candles - 1, The red line marks the minimum of the previous three candles, which is 1, This is how traders used to calculate stochastic readings.

Nowadays, it seems extremely inconvenient. Alternatively, you can use an automated indicator integrated into the LiteFinance online platform , Metatrader 4, or download the stochastic oscillator as an Excel calculator here. The principle of how this calculator works is straightforward. It is like the Excel Bollinger Bands Table the link to the instructions is here. When using the stochastic indicator on Forex, there are many signals.

That's why this tool is often used with other indicators for more accurate signals. In the following sections, we will explain the specifics of the signal types, methods of interpretation, and detection. How do you set the stochastic indicator? Usually, the parameters are defined by three meanings. The value 5 means that maximums and minimums will be calculated for the last five candles. In the formula, this parameter is presented by n. In fact, it will be double smoothed. Such an effect allows you to filter noise and reduce the number of fake signals, but it also increases the indicator's lag.

That's why it's called slow. If you don't want to use smoothing, you should use 1 as the last parameter. Such stochastic indicators are called fast. LiteFinance provides the full version of the indicator.

But if I could, I would call it Super Full! Platform provides such comprehensive settings. Such functions allow the user to set stochastic oscillators for any trading tool and market. There are no strict rules on what smooth settings to use, but it's vital to consider their differences for successful trading experiments.

There is a price chart above where numbers correspond to five signals of the stochastic oscillator on Forex. It's clear that the second and fourth signals are fake. The first and fifth ones reflect the local correction. The most valuable signal is the third one, which indicates a trend reversal. Later, we will talk about indicator signals in detail.

Now, it should be remembered as a condition for the experiment. A smoothing period for all types except fast stochastic is 3. We tested the signals on the M30 chart of the EURUSD pair. Still, results may vary on other timeframes and trading instruments. You can compare stochastic oscillators right now on LiteFinance in several clicks without registering. Timeframes also play an important role.

The best stochastic oscillator settings for М5, М15, М30, and, sometimes, H1 timeframes are 10,7,3 , 7, 3, 3 , or 5, 3, 3. On high timeframes, such parameters will contribute to plenty of false signals. Therefore, stochastic oscillator settings for H4, D1, and, sometimes, H1 charts are 9, 3, 3 , 14, 3, 3 or 21, 3, 3. You can use slower curves with 21, 7, 7 or 21, 14, 14 settings for daily and weekly charts.

The described setting combinations are used most often. You can practice and pick up your own parameters. Maybe you will succeed and find a perfect combination for your stochastic strategy. It's analyzed only in overbought and oversold zones. In other cases, such signs are useless. Below I will show how to use the stochastic oscillator on the EURUSD chart.

Here, it's worth opening a long trade near the highest point of the crossover candlestick. On the chart above, I marked the entry level with a green line. Here, we observe the opposite situation.

Therefore, we open a short position near the close price of the candlestick where the cross happened. At the same time, a small shift down is acceptable.

In the chart above, this situation is marked with a red oval. It's a sign that the rise slows down, and the price reverses down. In a similar fashion, it signals a slowdown of the price decline and that there is about to be a reversal. When analyzing the indicator's behavior in overbought or oversold zones, it's worth considering the reversal's formation. If the primary curve forms an acute angle, the following price movement will be intense. If the repeated break occurs after flat conditions, the move will likely be weaker but stable.

On the chart, blue squares indicate overbought areas; red ones mark oversold zones. In all three cases, the price reverses. The right blue square displays a sharp turn. It corresponds with the area on the graph marked with a blue oval.

After the reversal, there is an intensive downward movement. Based on the text above, you can understand what the divergence is and recognize its bullish and bearish formations. If you aren't sure yet, you should read the article "What the divergence on Forex is," where the issue is explained in detail.

Ignore the fact that there is a different indicator in the article. The stochastic oscillator follows the classic rules of the technical analysis for divergence and convergence.

Everything you read in this article will work for the stochastic. Bullish and bearish patterns look the same as divergences we covered above, but they provide different signals:. A bullish pattern is adjusted when the price forms a lower-than-previous high, but the stochastic has a higher high. It leads to a short-term price decline and a reversal. So, this pattern should be used as a bullish entry point ahead of the upcoming rise. A bearish pattern occurs when the price has higher lows, but the oscillator forms a lower minimum.

Later, the price will rebound and reverse. Circles and violet lines mark local minimums on the price chart and the stochastic indicator. This means the formation of a bullish pattern that outruns the reversal signal. There is a short-term price decline red area , a price reversal, and a new bullish trend green area. The stochastic indicator provides a vast number of different signals.

It can be applied to different trading methods: scalping, intraday, swing trading, etc. To implement the indicator in the chart, press "Indicators" and choose "Stochastic Oscillator" from the dropdown list. Most importantly, let's define the leading trend of the price movement. We will do it using the stochastic with 21, 7, and 7 parameters. Therefore, the downward movement is dominant.

The intraday trading occurs on timeframes that are not bigger than H1. For example, we will take the M30 one. The perfect settings for such a timeframe are 5, 3, and 3.

One such case is marked with a green oval. Note, curves stay in the overbought area for a long time. That's why the upcoming downward movement is supposed to be stable.

The next step is to identify the reversal pattern. An example of such a setup is depicted above as Doji. Still, there can be any other reversal combination of a classic candlestick analysis and Price Action. On the chart, this pattern is marked with a blue oval. When one of the following candles crosses a low point of the pattern, open a sell position at the price of 1. The stop-loss is placed slightly above the maximum point of the reversal pattern red line , and the take profit should equal two stop-losses.

There is an alternative option to define the take profit level. When the price falls, relocate the stop-loss to a breakeven zone. In our case, such a situation is marked with a red oval. Big periods for such a timeframe will be compensated by changing the limits to 30 and You can change these parameters in the "Style" tab of the indicator's settings.

Stop loss is set at the extreme of the local minimum of previous candles. The take profit is placed at a distance of the stop-loss or more in points. It is recommended to trade with small fixed lots.

We open a sell position at the close of the candlestick the blue line. The stop loss is placed at the local maximum the red line , and the take profit is almost at the same distance the green line. As we can see from the chart, the trade was successfully closed at the take profit level. To open a buy trade, the steps are similar. On the chart above, there is an example of the scalping strategy for a long trade. As we can see, the price hasn't reached the take profit level but turned around.

You should be ready for such situations as sometimes stochastic indicators provide fake signals. Profit is gained due to narrow stop-losses and plenty of trades, but most of them should be profitable.

To understand the stochastic swing strategy, we should learn the "Star" pattern. There are two types. To be completely honest, the ideal version of the pattern occurs rarely. But it's vital for the one in the middle to have a long shadow in the direction of the completing trend, and for the next candle to have a long body.

At the same time, the longer the body, the more reliable the signal is. In an ideal scenario, it should cover several previous candles. In the picture above, you can see an example of the shooting star that doesn't correspond to all the rules but provides a strong sell signal.

We will use the best stochastic settings for swing trading. These are 5, 3, and 3, which provide sufficient signal density. We should open a trade as soon as the bar after the pattern crosses its extreme in the trend direction. The stop-loss is set at the maximum point of the "Star". On the chart, you can see the shooting star's formation with the simultaneous crossing of the indicator lines in the overbought zone the blue circle.

We opened a trade at 1. A signal to exit the market was a curve cross marked with the red circle. We fixed the profit at 1. The final profit was points 1. If you want to find out more about swing trading, I recommend reading the «Swing Trading» article.

Each instrument shows its own behavior. It's crucial to consider it when trading. Looking at this instrument's historical price movements, it's visible that the price decline doesn't always follow a stochastic move to the overbought area.

Vice versa, when the indicator is in the oversold zone, it's more likely the market will rise soon. The signals of a bullish reversal work well when the market is temporarily oversold in the uptrend. Signs of a bullish correction will likely work if the market entered an overbought area in the downtrend.

When the market is temporarily oversold in the uptrend, signals on a bullish reversal usually don't work. Meanwhile, it's likely a bearish reversal works when the market is temporarily overbought in a downtrend.

The U. dollar often continues moving following the momentum when curves enter overbought or oversold zones. Therefore, you should enter the market when there is a price reversal. The stochastic Forex strategy isn't useful for USD if it's based on fixing overbought conditions during an uptrend and oversold ones during a downtrend.

The stochastic oscillator is a high-frequency indicator that can give many false signals, especially in strong directional movements. The oscillator ranges from zero to one hundred, usually Stochastic settings use 80 as the overbought threshold and 20 as the oversold threshold. Stochastic Oscillator is a range bound indicator and hence it is useful for identifying overbought and oversold levels , It also helps in identifying bullish and bearish divergence.

The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or any intraday time frame.

Stochastic Indicator is one among the famous indicators that most of the traders use. Developed by George C. Lane in the s,. If the stock is in overbought region it does not imply that the stock will fall immediately , Stocks can be in overbought region for a long period of time during a strong uptrend.

In the similar way if the stock is in the oversold region does not imply that the stock will rise immediately, Stocks can be in the oversold region for a long period of time during a strong downtrend.

Always understand how the indicator works and then take trade accordingly. With power comes responsibility, so use this powerful indicator for making profits and not loss! Pro tip: Add 20 EMA, which acts an additional filter, We buy when price is above EMA and 20 EMA. If you are aggressive trader i. e Risk taking capacity is more : One can buy at all the crossovers given by stochastic in the buy side see the video for more detailed explanation.

n the range bound market, there is no definite trend, these ranges are generally accumulation or distribution phase. Range markets can be identified by drawing a moving average,I have used 20 EMA here, and the prices will be oscillating above and below the moving average. Stochastic oscillator can be used to trade range bound markets. Once the range bound market is identified, the crossovers of stochastic fast and slow lines for both overbought and oversold region are traded.

In the figure above both the extreme crossovers are traded, if the width of the range is more it will lead to more profitable trade. Disagreement between the indicator and price is called divergence, Divergence can be used for profitable trading and also can help in trade management. When divergence is spotted, there is a higher probability of a price retracement. Divergence explained : Taking Tech Mahindra as an Example.

In the chart, Price is making Higher high but the indicator is forming lower low which is an example of divergence. When there is Divergence, the price usually follows the indicator direction, Traders should always keep an eye for Divergences. I am sure you now have in depth understanding of how stochastic work and how to use stochastic indicator to trade Trending, Trend less markets and also identify and trade divergences profitably.

Try this strategy and let me know how was your experience trading using this strategy. How to select stocks for Intraday?

That means you will almost always enter on pull-backs, guaranteeing relatively safe stop-loss levels. Five signals for this forex strategy can be seen in the example chart above. All stop-loss levels are marked with yellow horizontal lines on the chart.

The first signal is for a Short sell position with a close stop-loss; take-profit is achievable here. The second one is a bullish entry signal, which turns out to be a wrong pull-back, but, fortunately enough, the stop-loss SL is quite tight here. The third signal is not a signal because it is a bearish figure cross that appears in the lower half of the chart window and thus is disregarded. The fourth entry signal is bullish with a stop-loss SL quite far away, but even the most aggressive take-profit level would work here.

The final entry signal is for Short, with tight stop-loss SL and a lot of place for a rather profitable Take profit setting. Ideally, bullish and bearish entry signals should follow one after another. Still, it is not always the case due to the occurrence of false signals bearish in the lower and bullish in the upper half of the window. Use this strategy at your own risk.

com cannot be responsible for any losses associated with using any forex strategy presented on the site. Using this strategy on the real account is not recommended without testing it on the demo first.

Do you have any suggestions regarding this strategy? You can always discuss Stochastic Oscillator forex Strategy with your fellow Forex traders on the Trading Systems and Strategies forum.

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How do I use Stochastic Oscillator to create a forex trading strategy?,Live Trading with DTTW™ on YouTube

30/08/ · Once the stochastic oscillator crosses down through the signal line, watch for price to follow suit. Though these combined signals are a strong indicator of impending We use a stochastic oscillator to find the entry levels. The recommended settings are: Periods: 14, 3, and 3; and; Levels: 90% and 10%. Conditions for a long trade: There is a long-term Momentum always changes direction before price. The Stochastic oscillator uses a scale to measure the degree of change between prices from one closing period to predict the 28/06/ · Traders use the stochastic oscillator to help identify when a particular stock is over- or under-valued and when might be a good time to buy or sell. There are many 03/09/ · Add a Stochastic Oscillator forex indicator to the chart, set its %K period to 14, %D period to 7, and slowing to 7, and use the Simple MA method. Entry Conditions Enter the Long Add 20 EMA for filtering the signals given by stochastic indicator. Use stochastic overbought and oversold condition to generate buy and sell signals. The crossover point of %k (Fast) with ... read more

Try to use a stochastic oscillator with your favorite trend indicator. It makes sense to use the oscillator with other trend indicators. It's highly recommended to implement the stochastic oscillator with other trend indicators. If the primary curve forms an acute angle, the following price movement will be intense. The first one is the leading line or so-called fast stochastic.

At the same time, a small shift down is acceptable. You should be ready for such situations as sometimes stochastic indicators provide fake signals. To use it well, we recommend that you take time to try it in a demo account. We open a sell position at the close of the candlestick the blue line. All how to use stochastic oscillator strategies are used to open positions in the current trend or fix profit when the trend changes. Read here — Open-high-low-scanner. The stochastic indicator confirms this.

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