Stochastic Oscillator: Description and Method of Use

The financial market is a real serious business that requires attention and investment.

30 october 2018

The financial market is a real serious business that requires attention and investment. Professionals note that the most important factor for making money in trading is an analytical forecast of the market movement, which allows you to understand in which direction the price quotes will move. In almost any kind of analytics, experts use special tools such as technical indicators and charting.

Description of the Stochastic indicator

In trading, each instrument has its own purpose and is applied in accordance with the state of the market movement. The Stochastic Oscillator or Stochastic is a fairly popular indicator among traders and experts, allowing you to understand the market mood and its direction.

It belongs to the basic classic tools that are available on any trading platform or Web site in brokerage companies. This is a very simple and straightforward indicator and therefore it is widely used in trading by beginners. The oscillator is installed in a separate chart window. It looks like a line, and a scale with divisions, which periodically changes its direction depending on the situation in the financial market.

Indicator values:

  • From 0 to 30, Stochastic shows an oversold zone, that is, when there are more sellers than buyers in the market, as a result of which the asset’s offers become irrelevant.
  • From 70 to 100 – the market is overbought, in this case, the advantages remain with the buyers.
  • 30 to 70 is an undefined area. In this zone, it is not clear what direction the market will have in the future and therefore it is not recommended to open deals here.
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Stochastic trading

This indicator can be used both as an independent element and in combination with other instruments. But most often it is used as a filter to clarify the accuracy of analytics or to filter out false signals.

On its basis, traders, experts and professionals have developed a huge variety of trading strategies. For clarity, you can consider an example of one of the techniques.

Trading strategy “Two stochastics”

To trade using this method, you need to set 2 Stochastic indicators on the chart with standard settings on different time frames. For example, the first indicator will be installed on the working chart with the M-15 time frame, and the second, for finding the most profitable points for entering the market, on the M-5 time frame. The trader will track the trade on the M-15 working chart.

Trading rules:

  • It is necessary to conduct an analytical forecast of the market to find out its direction. The Senior Stochastic will show the state of the market movement, that is, in which zone it is located.
  • Buying a trading asset – the indicator must have an upward direction and indicators of values ​​from 0 to 30.
  • If the market quotes meet these requirements, then you need to wait for a signal from the lower Stochastic, that is, so that it has the same indicators on M-5.
  • Opening a sell order – the value of the senior Stochastic should be from 100 to 70 and its direction should go to the decline in market quotes. To confirm and search for the best entry points to the market, you need to wait for the same values ​​on the lower Stochastic M-5.
  • Opening a buy or sell position is performed when the values ​​of both indicators coincide.
  • A protective Stop Loss order is placed at the level of 10 to 20 points.
  • The Take Profit order can be set according to the wishes and expectations of the trader, usually 15 – 40 points.
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When working with any indicators, special attention should be paid to technical analysis of market movement and graphical construction. Candlestick patterns, configurations, figures that periodically form in the market have their own meanings and there are also many different techniques based on them.

The most popular ones are:

  • Engulfing candlestick patterns;
  • Patterns for continuing the direction of movement;
  • Chart patterns such as – Double and Triple Tops, Double and Triple Bottoms.

This is one of the most frequently recurring pattern variations that form in the financial market. To find out the direction of quotes, you need to wait until it is fully formed and only then proceed to technical analysis.

A double top is a reversal pattern indicating that after its complete completion and formation in the market, the direction of market quotes will change in the opposite direction. To understand how many points the price will change, you need to measure the distance from its base to the top, and first you need to calculate these distances separately, and then calculate their average total value. For example, if the average distance is 56 points, then you can expect a downward direction around 50 points. To confirm analytics, you can use the Stochastic indicator as a filter.



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