Traditionally, readings over 80 are considered in the overbought range, and readings under 20 are considered oversold. However, these are not always indicative of impending reversal; very strong trends can maintain overbought or oversold conditions for an extended period. Instead, traders should look to changes in the stochastic oscillator for clues about future trend shifts.
Stochastic oscillator charting generally consists of two lines: one reflecting the actual value of the oscillator for each session, and one reflecting its three-day simple moving average. Because price is thought to follow momentum , the intersection of these two lines is considered to be a signal that a reversal may be in the works, as it indicates a large shift in momentum from day to day. Divergence between the stochastic oscillator and trending price action is also seen as an important reversal signal.
For example, when a bearish trend reaches a new lower low, but the oscillator prints a higher low, it may be an indicator that bears are exhausting their momentum and a bullish reversal is brewing. The stochastic oscillator was developed in the late s by George Lane. As designed by Lane, the stochastic oscillator presents the location of the closing price of a stock in relation to the high and low range of the price of a stock over a period of time, typically a day period.
Lane, over the course of numerous interviews, has said that the stochastic oscillator does not follow price or volume or anything similar. He indicates that the oscillator follows the speed or momentum of price. Lane also reveals in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. This signal is the first, and arguably the most important, trading signal Lane identified.
The stochastic oscillator is included in most charting tools and can be easily employed in practice. The standard time period used is 14 days, though this can be adjusted to meet specific analytical needs. The stochastic oscillator is calculated by subtracting the low for the period from the current closing price, dividing by the total range for the period and multiplying by By comparing the current price to the range over time, the stochastic oscillator reflects the consistency with which the price closes near its recent high or low.
A reading of 80 would indicate that the asset is on the verge of being overbought. The relative strength index RSI and stochastic oscillator are both price momentum oscillators that are widely used in technical analysis. While often used in tandem, they each have different underlying theories and methods.
The stochastic oscillator is predicated on the assumption that closing prices should close near the same direction as the current trend. Meanwhile, the RSI tracks overbought and oversold levels by measuring the velocity of price movements. In other words, the RSI was designed to measure the speed of price movements, while the stochastic oscillator formula works best in consistent trading ranges.
In general, the RSI is more useful during trending markets , and stochastics more so in sideways or choppy markets. The primary limitation of the stochastic oscillator is that it has been known to produce false signals. This is when a trading signal is generated by the indicator, yet the price does not actually follow through, which can end up as a losing trade.
During volatile market conditions, this can happen quite regularly. One way to help with this is to take the price trend as a filter, where signals are only taken if they are in the same direction as the trend. George Pruitt. Advanced Technical Analysis Concepts. Technical Analysis. Technical Analysis Basic Education. Your Money. Personal Finance. Your Practice. Popular Courses. The Stochastic oscillator is another technical indicator that helps traders determine where a trend might be ending.
This simple momentum oscillator was created by George Lane in the late s. Stochastics measures the momentum of price. If you visualize a rocket going up in the air — before it can turn down, it must slow down. Momentum always changes direction before price. The Stochastic oscillator uses a scale to measure the degree of change between prices from one closing period to predict the continuation of the current direction trend.
The 2 lines are similar to the MACD lines in the sense that one line is faster than the other. The Stochastic technical indicator tells us when the market is overbought or oversold. The Stochastic is scaled from 0 to When the Stochastic lines are above 80 the red dotted line in the chart above , then it means the market is overbought.
Technical traders can add the stochastic oscillator on top of a security's price chart, which often appears in its own window below the price. There will typically be a horizontal line drawn at the 80 and 20 levels of the index as well as at the mean When the stochastic line falls below 20 or rises above 80, it produces a trading signal. In particular, you would subtract the highest high observed in your lookback period from the last closing price and put this into the numerator of a fraction.
In the denominator, you would take the difference between the highest high and lowest low prices over that same period. Then, multiply by Stochastics is a favorite technical indicator because of the accuracy of its findings. It is easily perceived both by seasoned veterans and new technicians, and it tends to help all investors make good entry and exit decisions on their holdings.
Technical Analysis, Inc. CMT Association. Organisational for Economic Co-Operation and Development. CMC Markets. Technical Analysis Basic Education. Technical Analysis. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. Price Action. Reading the Chart. Stochastics FAQs. The Bottom Line. Part of. Part Of. Options Trading.
Futures Trading. Key Takeaways 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. Stochastics are used to show when a stock has moved into an overbought or oversold position.
What Are Stochastics? What Is a Stochastic Stock Chart? Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. What is the double smoothed stochastic? The Double Smoothed Stochastic Set your teadingview theme to dark theme. My indicator is valid for forex, stock and but more valid for crypto. Use three timeframe for more validation choose between those, that fit to your trading style : - Timeframe 1m, 5m, and 15m for Scalping - Timeframe 30m, 1h and 4h for Intraday - Timeframe 4h, 1D and 1W for Custom Stochastic Oscillator with range plot.
It is based on MACD but run through a stochastic oscillator. This results in an indicator with all the same properties as MACD but with the benefit that the absolute levels can be compared to history values. And because Stochastic I use this formula a lot if I want to build in a Stochastic trend filter in my strategies. In this version I added options to plot This script is a compilation of several different stochastic indicators and RSI where the K value of each indicator is equally weighted.
The purpose of the indicator is to combine many indicators together in a fashion that weights them Orange plot, and hlines at 20, 50 and 80 can be used as signal lines. I personally use hlines as the signal in 1H as it's the best timeframe for the indicator. If you are in a long position, sell when yellow plot crosses Credit for the idea goes to Indicator-Jones. I designed this script especially for trading altcoins, but it works just as good on Bitcoin itself and on some Forex pairs.
You also want some guidance and get some mentors providing you with comprehensive and simple trading methods and tricks. I'm against those posting many scripts a day that in the end will make Accidentally, because this was aimed to be purely educational material. A few days ago TradingView released a very powerful feature of dynamic values from PineScript now being allowed to be passed in Alerts.