How to Use Stochastic Oscillator in Trading
Daytradingz.Com highlights about ten key trading indicators widely used by investors nowadays. Such analytical tools are employed to simplify the prediction of asset rates. Investors consider the Stochastic oscillator (SO) among the most efficient tools among those popular today.
However, some investors find this indicator quite complex to employ. That’s mostly about beginners. This is why experienced specialists created a brief but comprehensive description of the oscillator to simplify such traders performing analysis using this tool.
What Should Be Known About Stochastic Oscillator?
The specified indicator is mostly used to perform technical analysis. Commonly, investors apply the SO with other analytical tools like MA (moving averages) or trendlines. The described tool determines the momentum (boost rate) of price shifts.
Remember, the profit you can gain using the SO depends on the online broker you cooperate with. Traders will unlikely get much income if their brokerage platforms charge hidden commissions, permanently delay withdrawals, and constantly change coworking terms. That’s why experienced investors only recommend cooperating with reputable brokers (like FBS).
Features of Stochastic Indicator Operation
The mentioned tool is a two-line oscillator that has a 0-to-100 scaling. Considering the current scale value, traders make decisions. The specified tool may be applied to any chart. The SO displays the ongoing asset price compared to the minimum and maximum rates during a certain past period. The latter is typically divided into 14 parts. For instance, this can be 14 weeks or 14 hours for a weekly or hourly chart.
Technical Features of SO
When using the mentioned indicator, white (blue) as well as red (orange) lines appear on a chart. They’re called the %K (fast) and %D (slow) lines, correspondingly. The %K one quickly reacts to asset rate shifts. On the other hand, the %D line is a three-part MA of %K.
General Rules for Stochastic Oscillator
The described tool excels in a great effect in a slow-moving trend and broad trading range. You should remember the following general rules when employing the SO:
- when the indicator is at minimum or maximum levels, prices shut near the bottom or top of a whole 14-part period;
- prices usually close beside the minimum and maximum in a downtrend as well as uptrend markets, correspondingly;
- if closing prices are far from low and high, momentum becomes slower.
You also should keep in mind that the SO doesn’t allow for measuring the asset rate shift range. It’s only about momentum determining.
This strategy is among the most popular today. So, let’s look at SO usage as a part of it. Here, you should perform transactions when %K and %D Stochastic lines cross each other or intersect with 80 as well as 20 lines (according to 0-to100 scaling). It’s necessary to consider the following line positions:
- %K crosses below %D – that probably signals to sell assets;
- %D crosses below %K – this possibly tells you to buy securities;
- %K intersects with the 80 line – the product is overbought;
- %K intersects with the 20 line – the product is overbought.
In the first two cases (%K and %D intersections), the fast and slow lines may cross each other anywhere on a chart. However, traders consider intersections above 80 and under 20 to be more essential signals.
Benefits of Stochastic Indicator
Initially, it should be noted that this oscillator has a simple design. This allows for determining points when you have to sell or buy assets easily. The other advantages are:
- Possibility to use as a part of intraday and long-term trading. In the first case, investors receive signals more frequently depending on the timeframes they use (5, 10, 15, etc., min).
- Availability on most trading platforms.
- Ability to employ various strategies based on the described indicator. The overbought/oversold tactic isn’t the only one. Traders also use divergence, bull/bear, and crossover strategies when employing the SO.
You can get additional information on this topic in thematic blogs (e.g., at fbs.com).
The SO is an excellent tool to improve your trading efficiency significantly. The specified indicator stands out for its simple design. So, even beginners can employ it. Furthermore, the described oscillator lets you use plenty of effective trading tactics as a part of intraday and long-term trading. The latter allows for getting even more income.