The stochastic oscillator shows the rate of change of the closing price of an asset over a given period. By comparing it to the highest and lowest range of the period, it reveals market trends and whether the asset is overbought or oversold.
This indicator is easy to use on your trading station and is a valuable tool to help you decide whether to buy or sell.
Stochastics is a stock market indicator commonly used by traders and analysts in Forex and cryptocurrencies. This indicator shows, for a given period of time, the closing price level compared to previous closings, i.e. the price difference recorded over a given period.
In short, the stochastic indicator shows the rate of change of the closing price over the period.
By following the evolution of the closing price, the stochastic oscillator enables the detection of highs and lows of cycles in order to :
The stochastic indicator is called %K.
It is expressed as a percentage on a graph :
The stochastic indicator of a stock is calculated automatically on your trading station. % K = ((Closing price at time T - Lowest range in period) / (Highest range in period - Lowest range in period)) *100
Using the stochastic oscillator to anticipate a weakening trend
The stochastic indicator is more precisely an oscillator: it is analyzed with regard to two extremes, namely the lowest closing price and the highest closing price recorded over a period:
The extreme zone (overbought or oversold) points to a loss of momentum with :
The indicator may remain stuck in an extreme zone, showing trend inertia.
Slowing down the movement of the indicator on the chart enables you to obtain a slow stochastic oscillator, i.e. a smoothed curve (elimination of fluctuations in the moving average). This approach enables you to clearly visualize the up or down trend of the closing price. The slow stochastic oscillator is referred to as %D.
Please note :
The Stochastic Oscillator is easily set up on most trading stations and can be found among the secondary indicators.
You need to configure :
On the chart, the thresholds are highlighted by lines, enabling you to see at a glance the positioning of the stochastic indicator throughout the period in relation to the two selected extremes. This will show you if the trend is oversold, overbought or in the neutral zone.
In conclusion, the stochastic indicator analyzed in the context of closing price extremes allows to visualise at a glance the trend of the stock with its potential loss of momentum. Easily configurable on trading stations, it is an excellent decision support tool.
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The stochastic indicator was modeled by trader and technical analyst George Lane in the late 1950s.
Warning : Do not confuse this indicator with stochastics used in mathematics to represent the distribution of chance, which is the opposite of what traders expect !