by woopsowew » Fri Aug 13, 2010 1:55 am
The Stochastic indicator. An overbought/oversold indicator I used often on my charts. a momentum oscillator that oscillates between 0 and 100 and consists of two lines.
Its idea is based on the assumption that when the price increases it tends to be closed near the high of the recent price range. Conversely, when the price decreases it tends to be closed near the low of the recent price range.
The Stochastic indicator can be found in almost every MetaTrader platform. In its calculation, it takes five parameters into consideration:
K Periods: The number of periods bars used in the Stochastic calculation.
K Slowing Periods: The smoothing rate of the K line, 1 for example means it’s a fast K and 3 for example means slow K.
D Periods: The number of periods used for calculating the moving average of K and which produces D line.
Price field: The type of price used in calculating the moving average of K which can be one of: High/Low or Close/Close.
MA method: The method Exponential, Simple, Smoothed, or Weighted of the moving average of the K line.
To trade using the indicator, there is 3 ways.
1- Overbought / Oversold:
When one of the stochastic line crosses the 20 and 80 levels it means it was an Overbought or Oversold market moods.
We Buy when the stochastic falls below 20 level then rises above it.
We Sell when the stochastic rises above 80 level then falls below it.
2- Crossover:
We can treat the K and D lines of the stochastic indicator very much like two moving averages indicators one of them is fast and the other is slow and play the crossover game.
We Buy when K crosses down up the D.
We Sell when the K crossed above down the D.
Note: The crossover of the stochastic line often provides choppy signals that need to be filtered with another indictors.
3- Divergences:
Divergences between the stochastic lines and the price is a good signal for Buying or Selling the security. For example, if prices are making a series of new highs and the stochastic is trending lower, you may have a warning signal of weakness in the market.