Stochastic Oscillator as a powerful tool of technical analysis

best stochastics settings
best stochastics settings

An overbought sell signal is given when the oscillator is above 80, and the solid blue line crosses the red dotted line, while still above 80. Conversely, an oversold buy signal is given when the oscillator is below 20, and the solid blue line crosses the dotted red line, while still below 20. Like all technical analysis indicators, to set up the stochastic RSI in TradingView, go to the “Indicators” tab. Please search for the stochastic RSI, and once located, click on it to install it on your charts. You can also experiment with various settings to discover this technical analysis indicator’s nuances before using it in your trading. You can also use complimentary technical analysis indicators, such as the Accumulation Distribution Line and the On Balance Volume , among many others.

  • Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time.
  • Instead, focus on the buy signals generated by Stochastics and you will have the benefits of trend trading.
  • In other words, when the StochRSI crosses above 50, it’s a possible buy signal, and when it falls below 50, it indicates a sell signal.

The point of using the Stochastic in this way is the momentum bounce, which is reflected with a unique Admiral Pivot set on hourly time frames. Trend identification is crucial to success when trading using overbought and oversold levels. When the more significant trend is up, traders often look for oversold conditions to find buying opportunities. Chart 6 shows International Gaming Tech with a bullish divergence in February-March 2010.

Stochastic and Moving Average Profit Target

The close less the lowest low equals 8, which is the numerator. The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings indicate that price is near its low for the given time period. High readings indicate that price is near its high for the given time period.

The most effective slow stochastic was the one with smoothing EMA. This indicator successfully filtered fake signals and was slightly faster compared to its counterparts. This is how traders used to calculate stochastic readings and used to define the highest and lowest prices. On the chart, the bar with which we calculate the stochastic indicator is marked with green. The green line highlights the highest price for the last three candles – 1,17994. The red line marks the lowest price of the previous three candles, which is 1,17948.

What is the Formula for the Stochastic Oscillator?

But it can help you anticipate where the pullback might end, so you can better time your entry and trade with the trend. A Swing Low Pattern is a 3 bar pattern and is defined as a bar that has one preceding and one following bar with a higher low. Here is how to identify the right swing to boost your profit. The Stochastic indicator will only make you pull the trigger at the right time. A modern sniper elite trader only pulls the trigger on a trade when he is certain he can pull a winning trade.

Whenever prices move towards a new high, yet the K line fails to reach a similar level as the last peak , this could indicate that prices may be ready to reverse directions. If you observe these signals, it may be best to exit your current positions accordingly. Until now we have regarded the overbought and oversold market thresholds to be static, and unaffected by the prevailing market trend. In essence, a %K-line crossover is when the %K-line crosses over the %D-line, which acts as a form of confirmation that the short term trend now has turned around. Another very common approach to trading the stochastics indicators is %K-line crossovers.

The default thresholds are 20 for oversold and80 for overbought. These are typical levels but may not be suitable for all situations depending on the financial instrument being traded. Finding the correct levels comes with some experimentation as well as historical analysis. Remember, it is typically best to trade along with the trend when using Stochastic to identify overbought/oversold levels.

best stochastics settings

Hence probability of errors can be there in very short-term trading. Stochastic can be more useful if applied along with support and resistance for that stock or security. While using stochastic oscillator, we have to look for K line crossover the D line.

The reason is that overbought does not always mean a bearish move just like oversold does not always mean a bullish move. Many times overbought conditions can be a sign of a strengthening trend and not necessarily an impending reversal. The Stochastic Oscillator is a range bound momentum oscillator.

As we’ve covered, the only thing stochastic measures is the relationship of the close to the highest high and lowest low of the period. Having covered the main uses of the Stochastics oscillator, we’ll now take a closer look at how traders typically use stochastic in their trading. In the image below I’ve opened the indicator settings for the stochastic indicator.

Best Stochastic Trading Strategy ( PDF & Indicators

Another reputable oscillator is the RSI indicator, which is similar to the Stochastic indicator. We chose it over the RSI indicator because the Stochastic indicator puts more weight on the closing price. This is the most important price no matter what market you trade.

You can read more about them in my article “Bollinger Bands Indicator in Forex”. It’s essential to determine the technical indicator’s direction and its location in the area above or below 50%. In our case, the blue main %K line is in the chart’s upper zone and is moving down .

best stochastics settings

If both the main and signal curves are above the zero line , the market is overbought; if below, the market is oversold. This way the user can always have a better understanding of the overbought and oversold levels of the market. Moving average convergence/divergence is a momentum indicator that shows the relationship between two moving averages of a security’s price. In technical analysis, stochastics refer to a group of oscillator indicators that point to buying or selling opportunities based on momentum. In statistics, the word stochastic refers to something that is subject to a probability distribution, such as a random variable. The K line is faster than the D line; the D line is the slower of the two.

I’m using the Tradingview platform, but most platforms should have similar settings. In essence, the only difference is that the slow stochastic has another 3-period average applied to the %K-line, which makes the line appear smoother. What is the VWAP and how to use it in MT4 and other platforms?

What is the ideal Stochastics configuration for maximum performance?

But it’s vital for the one in the middle to have a long shadow in the direction of the completing trend, and for the next candle to have a long body. Stop loss is set at the extreme of the local minimum of 3-5 previous candles. The take profit is placed at a distance of the stop-loss or more in 5-10 points. Most importantly, let’s define the leading trend of the price movement. We will do it using the stochastic with 21, 7, and 7 parameters. To implement the technical indicator in the chart, press “Indicators” and choose “Stochastic Oscillator” from the dropdown list.


By looking at the movements of the stochastics indicator, traders can get a better understanding of whether it is time to buy or sell. Best Stochastic SettingsComing from adaptive oversold and overbought thresholds, it’s time to discuss the best stochastic settings. Note that both charts above use the slow stochastic indicators, for the reasons already mentioned. Now, when looking for these kinds of crossovers, it’s better to use the slow stochastic, simply since it will produce much less false signals.

%K, in turn, is a measure of the close price in relation to the high-low range of the last n-bars, as defined by the user. StochasticThe blue line is %K, which sometimes is referred to as the actual stochastic line, while %D is represented by the orange line. If you want to learn more about the relative strength index and related trading systems, I recommend reading this article. The blue circle points to the moment when the bar touches the bottom line. In the same area, the %K crosses %D from the bottom, thus, confirming the primary signal.

The investor needs to watch as the D line and the price of the issue begin to change and move into either the overbought or the oversold positions. The investor needs to consider selling the stock when the indicator moves above the 80 levels. Conversely, the investor needs to consider buying an issue that is below the 20 line and is starting to move up with increased volume. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum. The Stochastic indicator works best when using the standard indicator that you can find on both the MT4 and MT5 platforms. Some custom-made Stochastic indicators may cause slowdowns, and may even use different formulas.

Sorry, short stock below 200 MA & stochastic overbought then. It’s simply an entry trigger to enter a trade once your other trading criteria are met. Rayner you are an Iumination to your generation and beyond. I have struggled to understand this stochastic concept for a while now.

Big trading range periods for such a timeframe will be compensated by changing the limits to 30 and 70. You can change these parameters in the “Style” tab of the indicator’s settings. When analyzing the indicator’s behavior in overbought or oversold zones, it’s worth considering the reversal’s formation in order to spot a potential buy or sell signal.

You’ll look for trading setup on the lower timeframe – to go short. Because if you want to find high probability trades, then you want to be trading with the higher timeframe trend — and not against it. The settings on my Stochastic indicator is and it’ll show a single line instead of the traditional 2 lines. Let’s turn our focus again to the EUR/USD 15-minute chart presented earlier and see how to use stochastic indicator in combination with the Swing Low Pattern. Please have a look at the chart example below to see how to use the stochastic indicator.

Forex signals are available to help you make more money by having a more successful Forex trading journey. Please note that such trading analysis is not a reliable indicator for any current or future what are stocks and how do they work performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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