Today we’re going to talk about What is the Stochastic Indicator and how this indicator works. we had mentioned will calculation. Hope this will help you in making your trading experience better.
What is the Stochastic Indicator?
The Slow Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. The indicator can range from 0 to 100. The closing price tends to close near the high in an uptrend and near the low in a downtrend.
Stochastic Indicator is also a momentum indicator used by Numerous number of traders. It’s the same as MACD (Moving Average Convergence Divergence) indicator but has no histogram and some bunch of other parameters also. There is a parameter called %K or person K with a default value of 14 and a %D or person D with a default value of 3. There is also a parameter for Smooth whose value is also 3 by default.
How this indicator works
- Generally, the area above 80 indicates an overbought region, while the area below 20 is considered an oversold region. A sell signal is given when the oscillator is above the 80 level and then crosses back below 80. Conversely, a buy signal is given when the oscillator is below 20 and then crossed back above 20. 80 and 20 are the most common levels used but can be adjusted as needed.
- A crossover signal occurs when the two lines cross in the overbought or oversold region. A sell signal occurs when a decreasing %K line crosses below the %D line in the overbought region. Conversely, a buy signal occurs when an increasing %K line crosses above the %D line in the oversold region.
- Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price make a lower low, but the Stochastic Oscillator forms a higher low. This indicates less downward momentum that could foreshadow a bullish reversal. A bearish divergence forms when price makes a higher high, but the Stochastic Oscillator forms a lower high. This shows less upward momentum that could foreshadow a bearish reversal.
Calculation
Slow %K= 100[Sum of the (C – L14) for the %K Slowing Period / Sum of the (H14 – L14) for the %K Slowing Period]
Slow %D = SMA of Slow %K
Where:
C = Latest Close
L14 = Lowest low for the last 14 periods
H14 = Highest high for the same 14 periods
%K Slowing Period = 3
How to use it?
Here also, this indicator has an overbought and oversold condition at 80 and 20 respectively. Traders use the crossover of %D and %K to buy/sell. If %D crosses over %K above the 80 levels then it’s a sell signal and if %K crossover %d below 20 levels then it’s a buy call. Using standalone is not a good strategy for trading because indicators provide many false signals throughout the sessions.
