The stochastic oscillator is a popularmomentum indicator. It compares the price range over a given time period to the closing price of the period.It is highly sensitive to price movements in the market and perhaps oscillates more frequently up and down than nearly any other momentum indicator.
Combining the stochastic oscillator with other technical indicators can help you confirm the signals you receive. Some of the best technical indicators to pair with stochastic are moving average crossovers, moving average convergence divergence (MACD), and relative strength index (RSI).
Key Takeaways
The stochastic oscillator is a technical indicator that helps identify overbought and oversold signals.
As a momentum oscillator, it pairs well with other momentum oscillators to confirm its indication.
Some of the best technical indicators to pair with the stochastic oscillator are relative strength index (RSI), moving average crossovers, and moving average convergence divergence (MACD).
Why the Stochastic Oscillator Is Sensitive to Price
The basic theory behind the stochastic oscillator is that prices generally close near the high in an up-trending market, while in a down-trending market prices typically close near the low.
Trading signals are given when the %K line (current price compared to recent price range) crosses over a three-period moving average line known as the %D.
The stochastic oscillator is one of several momentum oscillator indicators, which also include RSI, MACD, and the triple exponential moving average (TRIX). It's used to determine price momentum as well as the strength of a prevailing trend; it can help you see reversals and retracements in trending markets. In ranging markets, the stochastic oscillator can indicate fading strength.
The stochastic's sensitivity to price movement can provide early signals of directional change in a market, but it can also provide a lot of false signals. This sensitivity can be reduced by altering the time period used; "fast" stochastic typically uses a 14-period (usually days) time frame. "Slow" stochastic uses a moving average (usually three periods) of the stochastic oscillator’s value.
Technical Indicators to Pair With the Stochastic Oscillator
Some of the best technical indicators to complement the stochastic oscillator are moving average crossovers and other momentum oscillators.
Moving average crossovers can be used as a complementto crossover trading signals given by the stochastic oscillator. A bullish crossover, which occurs when a short-term moving average crosses from below to above a long-term moving average, confirms an upward trend. A bearish crossover provides additional confirmation of a downtrend indication.
Other momentum indicators, such as the relative strength index (RSI) or the moving average convergence divergence (MACD), can also be used to complement the stochastic oscillator. Either of these commonly used momentum indicators can be looked at for signals that are in agreement with the stochastic oscillator toconfirm its indication.
What Is the Best Time Frame for Stochastic Oscillator?
You can adjust the time frame for the stochastic oscillator to one that suits you. The standard setting is 14 periods (i.e. days or hours).
How Do I Combine MACD and Stochastic?
Combining MACD and stochastic is a double-cross strategy that puts these indicators' complementary natures to good use. If you find a bullish MACD crossover that crosses slightly after the stochastic, for instance, you may confirm a trend in rising prices.
Can I Use RSI and Stochastic Together?
Yes, you can absolutely use RSI and stochastic together; some people call this StochRSI. This combo was developed by Tushard Chande and Stanley Kroll, and it shows where the RSI's current value is as compared to the high/low range for a specified period.
When you combine RSI and stochastic, you can uncover buy and sell signals that you might miss otherwise. Stochastic RSI readings range between 0 and 1, with readings below 0.2 indicating oversold and above 0.8 indicating overbought. Overbought readings in a downtrend could indicate a potential price move, for example. When using stochastic RSI, you'll want to look for crossovers to inform a buy or sell signal—when it moves from below 0.2 to above 0.2, or above 0.8 to below 0.8. But before you commit to the trade, you'll still want to confirm the price action with other corroborating evidence.
The Bottom Line
While using momentum-based indicators should not be your sole strategy, they provide valuable insights when combined with other indicators and information. Pairing the stochastic oscillator and its ability to generate overbought and oversold signals with another technical indicator can help you uncover buy and sell signals. Some of the best indicators to add to your screens with stochastic include other momentum oscillators such as moving average crossovers, MACD, and RSI.
Combining the stochastic oscillator with other technical indicators can help you confirm the signals you receive. Some of the best technical indicators to pair with stochastic are moving average crossovers
moving average crossovers
In the statistics of time series, and in particular the stock market technical analysis, a moving-average crossover occurs when, on plotting two moving averages each based on different degrees of smoothing, the traces of these moving averages cross. It does not predict future direction but shows trends.
https://en.wikipedia.org › wiki › Moving_average_crossover
, moving average convergence divergence (MACD), and relative strength index (RSI
relative strength index (RSI
The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security.
The Bottom Line. As a trader using technical analysis to make decisions, you can combine various indicators to get better results and beat your competitors. Pairing two of the most well-known indicators, MACD and the stochastic oscillator, should allow you to achieve better results than just using one of these.
By applying a stochastic oscillator formula to RSI values, the stochRSI aims to provide a more nuanced view of overbought and oversold conditions (that is, when prices are too high or too low) for financial assets.
The responsive 5-3-3 setting will flip buy and sell cycles frequently, often without the lines reaching overbought or oversold levels. The mid-range 21-7-7 setting will look back at a longer period but keeps smoothing at relatively low levels.
The best pairing is to combine the Awesome Oscillator with the Stochastic Oscillator. The two are complimentary and will confirm changes in momentum. Other good combinations are with the Relative Strength Index (RSI) or with the Moving Average Convergence/Divergence (MACD).
Combining the stochastic oscillator with other technical indicators can help you confirm the signals you receive. Some of the best technical indicators to pair with stochastic are moving average crossovers, moving average convergence divergence (MACD), and relative strength index (RSI).
Traders use the Stochastic Oscillator to generate specific entry and exit signals. For instance, when the Stochastic Oscillator's %K line crosses above the %D line in the oversold region (typically below 20), it may trigger a buy signal, suggesting that the asset is primed for an upward move.
The stochastic oscillator formula works best when the market is trading in consistent ranges. RSI is generally more useful in trending markets and stochastics are more useful in sideways or choppy markets.
The default settings of the stochastic oscillator are 14, 3, and 3, which means that it uses 14 periods to calculate the %K line, 3 periods to calculate the %D line, and 3 periods to smooth the %D line. However, these settings are not fixed and can be adjusted to suit different markets, time frames, and trading styles.
RSI is often used to obtain an early sign of possible trend changes. Therefore, adding exponential moving averages (EMAs) that respond more quickly to recent price changes can help. Relatively short-term moving average crossovers, such as the 5 EMA crossing over the 10 EMA, are best suited to complement RSI.
80 and 20 are the most common levels used, but can also be modified as required. For OB/OS signals, the Stochastic setting of 14,3,3 works well. The higher the time frame the better, but usually a H4 or a Daily chart is the optimum for day traders and swing traders.
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 crosses back above 20. 80 and 20 are the most common levels used but can be adjusted as needed.
The default settings are 5, 3, 3. Other commonly used settings for Stochastics include 14, 3, 3 and 21, 5, 5. Stochastics is often referred to as Fast Stochastics with a setting of 5, 4, Slow Stochastics with a setting of 14, 3 and Full Stochastics with the settings of 14, 3, 3.
The Relative Strength Index (RSI) is one of the most popular oscillators in the market. It is a popular indicator that was developed by J. Welles Wilder, a well known expert who also created other indicators like the Average Directional Index (ADX) and the Average True Range (ATR).
By subtracting the 34-period SMA from the 5-period SMA, we can calculate the awesome oscillator: Awesome oscillator = 105 (5-period SMA) - 100 (34-period SMA) = 5.
One typical combination is to use moving average convergence divergence (MACD) and a chart showing support and resistance. A trader could use one momentum and one trend indicator, for example, a stochastic oscillator (a momentum indicator) and an Average Directional Index (ADX) (a trend indicator).
This combination uses one leading (RSI) and two lagging (MACD and SMA) indicators. The RSI shows the potential future price changes. The SMA is a trend-following indicator that lags. While the RSI shows potential reversal points, the SMA helps in confirming these signals.
A common strategy is to buy when the MACD line crosses above the signal line, as this indicates bullish momentum. Another strategy is to sell when it crosses below (which indicates bearish momentum). Forex traders also often look for divergences between the MACD and the price action to spot potential reversals.
If a trader has a longer-term outlook that this, the MACD may not be suitable. Another potential downside is that the MACD is a trend following indicator. This means that the indicator gives its signals as the trend occurs, not before it starts.
It is used to generate buy-and-sell signals with readings that suggest something is overbought (i.e., potentially expensive) or oversold (i.e., potentially cheap). MACD is a momentum oscillator that is generally best employed in trending markets—where prices are trending in a particular direction.
Address: Suite 492 62479 Champlin Loop, South Catrice, MS 57271
Phone: +9663362133320
Job: District Sales Analyst
Hobby: Digital arts, Dance, Ghost hunting, Worldbuilding, Kayaking, Table tennis, 3D printing
Introduction: My name is Kieth Sipes, I am a zany, rich, courageous, powerful, faithful, jolly, excited person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
