The Stochastic Oscillator Indicator

The Stochastic Oscillator is an indicator that allows for great versatility in trading. It was developed in 1950 

 by George C. Lane, it is one of the most common indicators used in Forex, indices, and stock trading.

Stochastic Oscillator Indicator:

We can use The Stochastic Oscillator Indicator for the following activities and aims :

    Divergence

    Day trading

    Scalping

    Buy / Sell confirmation

    Confirmation of Overbought / Oversold

What is the Stochastic Indicator?

The Stochastic Oscillator is a momentum indicator, which contrasts a specific closing price of an asset to its HIGH-LOW range over a set number of times. It is a range oscillator, operating between 100 & 0 by default. There are 2 lines displayed on the Stochastic Oscillator Indicator itself –the SLOW oscillating %K line and a moving average of the same % K that we refer to as %D. Slowing is applied to the indicator’s default setting as a time of 3. 

The Stochastic Oscillator Formula:

The Stochastic Oscillator is measured using the %K & %D lines

% K = 100 [ ( C – L14 ) \\ ( H14 – L14 ) ]

    C: is the latest closing price

    L14: is the lowest price when looking back at the 14 past trading sessions

    H14: is the highest price when looking back at the 14 past trading sessions

    %K tracks the recent market rate for the currency pair

    %D = 3-period simple moving average (SMA) of %K. It is called the ‘STOCHASTIC SLOW’ due its slower reactions to market price changes, as compared to %K.

The periods referred to are the basic periods used, this can be changed for different needs in the settings of the indicator.

Stochastic Divergence:

When the price is making a lower LOW, but the STOCHASTIC is making a highrise LOW– we call it a BULLISH divergence. If the price is making a highrise HIGH, but the STOCHASTIC is making a lower HIGH– we call it a BEARISH divergence.

Divergence occurs after a sharp price movement higher or lower. Divergence is a cue that the price might reverse, and it’s confirmed by a trend line breakout.

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