The Stochastic indicator developed by George C. Lane at the end of the 1950s and is actively used among traders all over the world ever since. It evaluates the market’s momentum and compares the closing price to a price over a certain period of time. The idea behind the indicator is that in bullish market prices will close near the high, and in a bearish market prices close near the low.
The Stochastics can show when the asset you trade is overbought or oversold. It signals when the market’s momentum is slowing down. This, in turn, means that a change in trend is likely. As a result, the observation of the indicator may provide you with trade signals and ideas.
How to implement indicator
The Stochastics is included in the default set of MetaTrader. You can add it to the chart by clicking “Insert” – “Indicators” – “Oscillators” and then choosing “Stochastic Oscillator”.
The Stochastic Oscillator can be used on all timeframes. 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.
Fast Stochastics responds more quickly to the changes in the market price, while Slow Stochastics reduces the number of false crossovers and thus filters out some of the false signals. It’s up to you to choose the parameters you want.
How to trade using Stochastic
The Stochastic is measured in % from 0 to 100. The indicator is represented by 2 lines: the fast one, also called %K (solid green line) and the slow one, which is referred to as %D (red dashed line). Line %D is the moving average of %K.
These lines intersect when momentum changes. The signal is to buy when % K (green) crosses % D (red) from the bottom up. Sell when % K crosses % D top down.
Like any other indicator, the Stochastics doesn’t give the signals that are 100% profitable. There are 2 ways to make the signals of this indicator more precise:
1. Use the signals generated when the crossover happens in the extreme area (above 80 for sell signal and below 20 for buy signal).
2. Take into accountthe trend on a larger timeframe and trade in line with it. For example, if you use Stochastic on H1, check the trend on H4. If there’s a strong uptrend, don’t take the sell signals as the price may stay in the overbought area for extended periods of time. Instead, focus on the buy signals generated by Stochastics and you will have the benefits of trend trading.
In additions, as with other oscillators, pay attention to the situations when the Stochastic Oscillator is in divergence with the price chart. A sell signal occurs when the price makes a higher high but the Stochastic forms a lower high (bearish divergence). A buy signal appears when the new low of the price is not confirmed by the oscillator.
It’s also recommended to use the Stochastic Oscillator in combination with other tools of technical analysis, such as Moving Averages, Heiken Ashi, Alligator, etc.
Conclusion
The Stochastic Oscillator is a powerful tool of technical analysis. It has several purposes and can be the basis of a good trading system.
2024-09-14 • Updated
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FAQs
1. Use the signals generated when the crossover happens in the extreme area (above 80 for sell signal and below 20 for buy signal). 2. Take into account the trend on a larger timeframe and trade in line with it.
How to use stochastic indicator to trade forex? ›
In a basic overbought/oversold strategy, traders can use the stochastic indicator to identify trade exit and entry points. Generally, traders look to place a buy trade when an instrument is oversold. A buy signal is often given when the stochastic indicator has been below 20 and then rises above 20.
What is the best setting for a stochastic indicator? ›
The default settings are 5, 3, 3. Other commonly used settings for Stochastic include 14, 3, 3, and 21, 5, 5. Stochastic is often referred to as Fast Stochastic with a setting of 5, 4, Slow Stochastic with a setting of 14, 3, and Full Stochastic with a setting of 14, 3, 3.
What is 5-3-3 stochastic settings? ›
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.
What is stochastic 14-3-3? ›
Stochastic (14, 3, 3) (STOCH)
Stochastic Oscillator 14 3 3 (STOCH) is a range bound momentum oscillator. The Stochastic 14 3 3 indicator is designed to display the location of the close compared to the high/low range over a user defined number of periods.
What is the best indicator combination with stochastic? ›
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).
What is the best time frame for stochastic indicator? ›
On high timeframes, such parameters may generate false signals. Therefore, stochastic oscillator settings for H4, D1, and, sometimes, H1 charts are (9, 3, 3), (14, 3, 3) or (21, 3, 3). You can use slower curves with (21, 7, 7) or (21, 14, 14) settings for daily and weekly charts.
What is the stochastic setting for 1 minute scalping? ›
For 1-minute scalping, the Stochastic Oscillator is typically set to the standard settings of 14, 1, 3. These settings help capture short-term momentum changes, providing timely signals for entry and exit points. Adjustments can be made based on the trader's specific strategy and market conditions.
How accurate is stochastic indicator? ›
Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
What is the formula for stochastic fast? ›
The Stochastic Fast Formula
Fast %K: [(Close – Low) / (High – Low)] x 100. Fast %D: Simple moving average of Fast K (usually 3-period moving average)
Interpretation. The Stochastic Oscillator is displayed as two lines. The main line is called "%K." The second line, called "%D," is a moving average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line.
Which indicator is better RSI or stochastic? ›
Relative strength index was designed to measure the speed of price movements. 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 Trader's Journal.
How to use Stochastic Indicator in forex trading? ›
How to Trade Forex Using the Stochastic Indicator. The Stochastic technical indicator tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to 100. When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought.
What are the best settings for Stochastic Indicator? ›
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.
What is the best stochastic model? ›
The Markov chain process is the best example of a stochastic model where the probability distribution of time t + 1 depends on the state at time t and does not depend on the states before time t.
How do you use a StochRSI indicator? ›
A reading above 0.8 is considered overbought, while a reading below 0.2 is considered oversold. Identify buy and sell signals: Traders can use the StochRSI to generate buy and sell signals. For example, when the StochRSI falls below 0.2, it indicates an oversold condition and a potential buying opportunity.
Is RSI or stochastic better? ›
Relative strength index was designed to measure the speed of price movements. 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.
