Stochastic Oscillator Formula


Interestingly, the dip in the index from the 24th July to 27th July saw the indicator move from an overbought to an oversold position. When the %K line moved through the %D line on 27 July, it indicated another rally. Then a short-term consolidation saw the trend lines dip under the critical 80% figure. That looked like a classic pullback after a strong rally. Not long after, the chart indicated another rally may be imminent. It was at the point when the trend lines crossed again, on the way up.

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  • Subsequent moves back above 20 signaled an upturn in prices and continuation of the bigger uptrend.
  • Chart 6 shows International Gaming Tech with a bullish divergence in February-March 2010.
  • The difference between the Slow and Fast stochastic oscillators is the Slow %K incorporates a %K slowing period of 3 that controls the internal smoothing of %K.
  • For example, price moves to a new high but the oscillator does not correspondingly move to a new high reading.

You can see in the above image the %K and %D lines touch the overbought level and on 9 June they turned downward, with the price following soon after. In this manner, it helps us predict a change in the direction of the price. The stochastic oscillator is easy to calculate in Excel.

The Stochastic Oscillator Technical Indicator compares where a security’s price closed relative to its price range over a given time period. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line. How to filter off market noise with the Laguerre polynomials.

So, this pattern should be used as a bullish entry point ahead of the upcoming rise. Based on the text above, you can recognize the bearish divergence from a bullish divergence, in the overbought or oversold region. If you aren’t sure yet, you should read the article”What the divergence on Forex is” where the issue is explained in detail. Below I will show how to use the stochastic oscillator by spotting the overbought and oversold conditions on theEURUSD chart. When the %K curve crosses the %D line upside-down, strong sell signals are monitored meaning that a bearish trend begins. A short position should be open slightly below the breakout point.

Stochastic indicator

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. 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 .


Although there is the possibility of identifying short-term trading opportunities. However, you can extend the number of periods in question for those who have a longer-term investment strategy. This will flatten the volatile, fast stochastic oscillator line and give a smoother line, potentially making it easier to identify any change in long-term trends. The second overbought position begins to emerge when the fast stochastic oscillator and the SMA move above 80%. A move above 80% or below 20% should not necessarily be seen as a signal to sell or buy but an early warning that momentum may be about to change.

Stochastic Oscillator: Types, Calculation and Applications

If %D rises above 80, look for a sell opportunity – the asset is overbought. If the %D line falls below 20 and starts turning up, look for a buy opportunity – the asset is oversold. For example, when the oscillator indicates bearish divergence, the price may still continue climbing higher for several trading sessions before turning to the downside. Finally, you can use the Stochastic Oscillator to find divergences.

The crossover between the %К and %D curves is the leading signal of the stochastic oscillator tool. It’s analyzed only in overbought and oversold zones analyzing the current closing price. Once, while observing the price changes, he noticed that there was not a trend but a reciprocating movement that prevailed on the market. So, he developed an indicator that would catch these dynamics and signal reversals in both directions. The stochastic indicator was based on the price bar’s major parameters – closing, high, and low prices. An indicator that measures the price velocity of a particular stock or market index, the stochastic oscillator essentially shows us where price is trading within a given range.

types of stochastic

The stochastic indicator can be used by experienced traders and those learning technical analysis. Typically, the stochastic indicator is employed by experienced traders and those learning technical analysis. In technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels.

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 where a trader can monitor how the spread bets, a price reversal, and a new bullish trend .

Stochastic Oscillator FAQ line crosses, moves below 80, and moves above 20 are frequent and prone to whipsaw. The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline. The offense has a higher chance of scoring when it crosses the 50-yard line.

As you can see from the chart below, the low point of the chart would indicate the potential for further downside. However, when you look at the stochastic oscillator indicator, the trend moves in a different direction and is slightly bullish. This may well indicate the stock has bottomed out, and the momentum may be about to turn.


Conversely, the oscillator is both oversold and weak when below 20. A move above 20 is needed to show an actual upturn and successful support test . Therelative strength index and stochastic oscillator are both price momentum oscillators that are widely used in technical analysis.

The Stoch Oscillator’s relation with the Relative Strength Index (RSI)

This is how the well-known stochastic oscillator was created. Range lines with values of 20 and 80 are generally accepted constants for this indicator. Once the %K line climbs into the 80 and above the region of the Stochastic scale, analysts consider this to be an overbought condition. This could lead to a sell-off forcing the price downwards.

ATR and Stochastic Oscillator

Arrow for binary options are the tools for “the lazy”. In the Forex charts they indicate with arrows the potential points of the market entering. Stochastic oscillators and RSI have benefits and limitations. Choose the indicator according to your trading strategy. If you want to learn more about the relative strength index and related trading systems, I recommend reading this article.

A stochastic indicator reading above 80 indicates that the asset is trading near the top of its range, and a reading below 20 shows that it is near the bottom of its range. The stochastic oscillator, like other indicators, may tell you when the price of asset swings into the overbought or oversold territory by signaling when these zones are reached. The biggest disadvantage is that stochastics perform poorly when the market isn’t trending. This means the stochastic oscillator will continue to generate poor or “false” signals when markets are trading in choppy or range-bound conditions.

However, we can consider them strong signals when they do occur. Ignore the fact that there is a different indicator in the article. The stochastic oscillator follows the classic rules of the technical analysis for bullish and bearish divergence and convergence. When using the stochastic indicator on Forex trading, there are many signals, including the overbought and oversold levels of the market. That’s why this momentum indicator is often used with other indicators for more accurate signals.

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