Stochastics Technical Indicator Step-by-Step Guide for Traders

A longer look-back period and longer moving averages for smoothing produce a less sensitive oscillator with fewer signals. Yahoo was trading between 14 and 18 from July 2009 until April 2010. 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 .

• Libertex MetaTrader 5 trading platform The latest version of MetaTrader.
• The defense has an edge as long as it prevents the offense from crossing the 50-yard line.
• Because of the oscillating nature of the stochastics indicator, it is possible to use stochastics to identify overbought and oversold levels in a similar way to how RSI is used.
• Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

The stochastic oscillator is an easy-to-use indicator. First, it’s a standard indicator of any trading platform. Second, it doesn’t require specific settings; you can use the default ones. If the price moves up and forms a higher high, while the indicator falls and has a lower high, we have a bearish divergence, which means the market will soon decline. In additions, as with other oscillators, pay attention to the situations when the Stochastic Oscillator is in divergence with the price chart. A sell signal occurs when the price makes a higher high but the Stochastic forms a lower high .

Fast, Slow or Full

The indicator is theoretically reasonably simple to understand and is available on most charting packages. The difference between the slow and fast Stochastic Oscillator is the Slow %K incorporates a %K slowing period of 3 that controls the internal smoothing of %K.

This indicates that momentum is increasing and the instrument’s price could move higher. Traders often look to buy after a brief price pullback in which the stochastic indicator has dropped below 50 on the pullback and then moved higher again. A bear trade setup occurs when the stochastic indicator makes a lower low, but the instrument’s price makes a higher low.

Problems with Stochastics

When used properly, stochastics can improve your timing and precision of entries and exits. At the very least, it can make you aware when you are chasing trades. The stochastic is my fave indicator, and I use it, with very short parameter settings, for reliable divergence trading. Also, when a short stochastic is superimposed over a longer term one , I always look for two https://www.bigshotrading.info/ great high probability setups, called “the slingshot” and “money on the floor”. The higher timeframe is in a downtrend and Stochastic is at overbought level. Because the market can remain overbought/oversold for a long period of time – far longer than your account can withstand it. So, when it’s at overbought level , it means the market has strong bullish momentum.