{"id":13616,"date":"2010-10-03T05:22:06","date_gmt":"2010-10-03T09:22:06","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=13616"},"modified":"2010-10-03T05:22:06","modified_gmt":"2010-10-03T09:22:06","slug":"basics-of-stochastic-indicator","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2010\/10\/03\/basics-of-stochastic-indicator\/","title":{"rendered":"Basics of Stochastic Indicator"},"content":{"rendered":"

By Taro Hideyoshi <\/strong>– The Stochastic Oscillator<\/a> is an overbought\/oversold indicator developed by Dr. George Lane. The stochastic is a common indicator that is integrated into every charting software including MetaStock<\/a>.<\/p>\n

Put simply, the Stochastic Indicator (SI) is a price oscillator which compares today’s price to its price range over a specific period of time. For example a 14-day SI, compares a derivative of today’s price with price 14 trading days ago. We will not go deep to the actual calculation here. Believe me! you will be glad that we do not.<\/p>\n

In an uptrend, the price usually moves to the upper end of the recent price range. In a downtrend, the price sinks to the bottom of the range.<\/p>\n

Stochastic Indicator is displayed in two lines; the major line is called %K (usually displayed in solid) and the %D (usually displayed in dotted line) as a 3-day moving average of %K.<\/p>\n

There are two forms of stochastic, fast stochastic and slow stochastic. The one mentioned earlier is fast stochastic. The slow stochastic is a smoothed version of fast stochastic. It usually moves more gradually.<\/p>\n

According to the strong correlation between tops and bottoms in price and SI tops and bottoms, the SI, therefore, is a powerful indicator and used-widely in short-term trading or day trading.<\/p>\n

How to apply Stochastic Indicator in Trading?<\/strong><\/p>\n

Whether fast or slow and whether period you use, the important buy\/sell signals from stochastic are as follows.<\/p>\n

1. The SI around 75% to 80% indicates that a top is imminent (overbought).
\n2. The SI around 25% to 20% is often an imminent sigh of a bottom (oversold).
\n3. Buy when SI is in oversold zone and the faster %K line crossed above the slower %D line.
\n4. Sell when SI is in overbought zone and the %K crosses the %D to the downside.
\n5. Look for divergences, it tells you that the price is going to reverse. If price makes a new high and at the same time that the stochastic makes lower high. This is called a “bearish divergence”. The “bullish divergence” is when the price makes a new low while the stochastic makes higher low.<\/p>\n

Many traders use stochastic indicator as stand-alone system. Although there is nothing wrong with this approach. I would suggest you to use it with others indicators or chart patterns to confirm the signal.<\/p>\n

Every indicator and method has its pros and cons. Use it to support each others. Do not take unnecessary risks; watch out for signals from your trading system<\/a>. If all indicators are in gear, it is the stronger and safer signal for you to enter a trade.<\/p>\n

About the Author<\/h3>\n

Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.<\/p>\n

If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

The Stochastic Oscillator is an overbought\/oversold indicator developed by Dr. George Lane. The stochastic is a common indicator that is integrated into every charting software including MetaStock…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-13616","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/13616","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=13616"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/13616\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=13616"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=13616"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=13616"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}