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Oscillator indicators forex

Oscillator indicators forexForex Stochastic Oscillator Formula for Day Trading. Any trading platform offers multiple indicators for analyzing a market. Either trend ones or oscillators, they help traders finding places to buy or sell. The Forex Stochastic oscillator is an accurate indicator for both scalping and swing trading. Moreover, the stochastic oscillator formula is simple and easy to use. Trading is a game of probabilities. As long as traders understand there’s no magic formula that works one hundred percent of the times, profits will come. The idea is to find a proper way to make money with the winning trades. Of course, the bigger the winning rate, the better. Risk management or money management plays an important role. Most of the times, traders face difficult decisions. In theory, it sounds very simple. Every trader knows heshe needs to cut losses asap. Or to let profits run. Everyone agrees with that.

Yet, this is a difficult thing to put into practice. The stochastic oscillator comes to help with this decision. As often is the case, retail traders end up losing money despite correctly reading the market. Greed and fear are the worse enemies. You may know where the market goes, but this doesn’t mean you’ll make a profit. Discipline and patience matter the most, while an indicator like the Forex stochastic one comes to help. Its biggest advantage is visibility. Traders see any signals generated and have plenty of time to react. This is especially true if the time frame is big enough. Another plus comes from its characteristics.

It is essentially following the market. The currency pair makes a new high? Chances are, the stochastic oscillator Forex indicator does the same. If not, trading strategies derive from it. What is Stochastic Oscillator? First of all, being an oscillator, it appears at the bottom of a chart. Any oscillator appears in a separate window at the bottom of a chart. This tells much about its usability: to spot fake moves the price may make. Second, it has two lines: the main and the signal line. They go hand in hand on that small window below the chart, and all eyes should be on these two lines. The signal one (the MetaTrader shows it with the red color) is a fast moving average, while the main one is a bit slower. The default settings show the 5 and 3 periods for the two lines, with the fastest one having the smaller number. While the default scenario uses a simple moving average, any type works: exponential, smoothed, etc. All options work just fine.

George Lane, the guy who developed the stochastic indicator Forex traders use, was a smart guy. He wanted to have an indicator that measures the difference between the actual price and the price range over a period of time. And this is exactly what the stochastic oscillator calculation shows. One thing is important here. The default settings are just default settings. By no means, one cannot change them. However, before doing that, keep in mind the two lines will flatten. This will make trading signals difficult, if not impossible to spot. Not to mention, irrelevant. For this reason, it’s best to use it with the default settings. If you apply it on a regular chart, it will look exactly like the image below. The usual caveat applies here too: the bigger the time frame, the bigger the implications. Stochastic Oscillator Formula.

Before discussing the actual formula, we should look at what it means. The indicator travels only in positive territory: between the zero and one hundred levels. You’ll never see values bigger than one hundred or smaller than zero. This just comes from how the stochastic oscillator parameters work. As mentioned above, its formula considers the main and the signal lines. The main line is %K and the signal %D. The actual formula is irrelevant. What matters the most for Forex traders is to know how to read the stochastic oscillator, not the mathematical formula. For math fans, though, this is how the mainline formula looks like: %K = 100(C – L5close)(H5 – L5) where C = the most recent closing price L5 = the low of the five previous trading sessions H5 = the highest price traded during the same 5 day period. The %D line is much simpler: %D = 100 X (H3L3). Now you know why the oscillator comes with the 5 and 3 values as the default ones: the five and the three day-periods make up the formula.

As a rule of thumb, an oscillator’s purpose is to detect a lie. Or a fake move that price might make. Between the price and an oscillator, traders should always trust the oscillator. How come? The answer is straightforward: there are more periods considered, whereas the price shows the current market stance. If one of the two is making a fake move, the price is the one. Hence, the Forex stochastic oscillator settings for day trading work best when traders use them against the current price. Stochastic Oscillator Settings for Scalping. Traders open and close a position based on various things. The most important one is time. To be more exact, the time horizon of a trade gives the type of the trading style used. Therefore, swing traders consider a few hours or even days for a trade. Investors don’t worry about time that much. What they do is they focus on the macro-picture. For investors, it matters most to be fundamentally right, then quick profits.

And then there are scalpers. This is where the average Joe, the Forex retail trader fits into. Retail traders start with a huge disadvantage: their own expectations related to trading. Most of them come to Forex trading for a quick and fast buck. The quicker, the better. The less effort, even better. Trading doesn’t work this way. Or, it may, but is not profitable this way on the long run. Yet, the stochastic oscillator formula is the same for all investors. The only difference comes from the time frame used. Here’s a quick guide for correlating a Forex stochastic strategy with the right time frame, having the time for a trade in mind: – investors use it on the weekly and monthly charts, focusing on the last one – swing traders come down to the daily, four-hour and hourly charts – scalpers typically use the five-minute and lower time frames. The strategies with the Forex stochastic oscillator to be explained here follow George Lane’s intention. That is, to create an indicator based on a simple formula that helps to spot fake moves. The beauty of this indicator is that all traders can use it. Are you in for a quick buck and scalping suits your personality? Use the stochastic indicator! Is swing trading your thing?

How about trying this indicator? Even investors find tremendous value in it. How to Use the Forex Stochastic Oscillator? George Lane wanted multiple things from this oscillator. And, in a way, he did a great job. Any oscillator, in the end, shows overbought and oversold levels. Hence, the first thing to look for is to buy oversold and sell overbought levels. But, an oscillator is more than that. The focus should always stay on it. When dealing with an oscillator, some traders won’t even look at the actual price. They simply trade the oscillator’s moves more than the ones the price does. Because the idea is to find out fake moves for the actual price, traders look for divergences. To be more exact, divergences between the price and the oscillator.

Hence, a great stochastic oscillator strategy is to trade these divergences. Moreover, if the absolute range is between zero and one hundred, can we do something about it? Is there any stochastic oscillator trading strategy derived from this? The rest of this article deals with three ways that show how to use stochastic oscillator. For this, we’re using the default settings, just like George Lane intended. All of them have one thing in common: they consider the cross between the signal and the main line. As always, keep in mind the time frame. The bigger it is, the bigger the implications for every strategy described below. Trading Overextended Levels. In Forex trading, overextended refers to overbought or oversold levels.

Therefore, the standard interpretation of an indicator that shows such levels is the following: buy oversold and sell overbought. The chart below shows the EURUSD hourly time frame. Moreover, this stochastic oscillator trading strategy uses the current prices. This is important as one can test the relevance of it. The stochastic oscillator indicator shows overbought and oversold levels above or below 80, respectively 20. However, keep in mind what was mentioned earlier: the cross between the two lines matter. As such, using the Forex stochastic oscillator this way assumes traders should look for a cross in an overbought or oversold territory. More exactly, above 80 or below 20. Since these are the levels, they give the entries. The idea is to sell on a cross above 80 and stay short until the fast line reaches the 20 level. And then, reverse. Go long on a cross below 20 and stay that way for the fast line to reach the 80 area. This approach of how to read the stochastic oscillator worked like a charm. At least, the EURUSD hourly chart above shows great entries. However, there’s a catch: it works when the market is in a range. The problem comes from the way the market behaves. While ranges predominate, they will be broken.

Eventually! And when that happens, no overbought and oversold level can help your trading account. In trading, there’s a saying: the market can stay in overboughtoversold areas more than a trader stays solvent. That is so true! As a consequence, there must be some other ways of using stochastic oscillator when the market breaks a range. A stochastic oscillator divergence will show the right direction. Moreover, if used with proper riskreward ratios and a disciplined approach, trading is fun. How to Use Stochastic Oscillator Divergences. A divergence forms when the price does something different than the oscillator. Or, the other way around.

In both cases, one is lying, and that one is the price. Hence, traders should focus on the oscillator, rather than the price. Divergences are of two types: bullish and bearish ones. The rule calls for long trades after a bullish divergence and short trades to follow a bearish one. Needless to say, bullish divergences appear at the end of bearish trends, and bearish divergences at the end or bullish ones. Therefore, trading them is risky! Have you ever heard of “catching a falling knife” in trading? If yes, it was invented when traders bought bullish divergences. However, traders are of two types: conservative and aggressive ones. Aggressive traders will always look to buy the absolute low. That is possible but very difficult. How about waiting for a confirmation? Divergences show how to use stochastic oscillator in Forex trading when a decision needs to be made. Have a look at the chart below in order to understand what a divergence is and how the market confirms it. Unfortunately, not everyone waits for a confirmation. That is when trading becomes expensive. Aggressive traders will argue here that better riskreward ratios derive from being earlier in a trade. As a side note, the reward should be always bigger than the risk.

Two, three or even higher multiples are part of a successful trader’s toolkit. In any case, divergences give an educated guess regarding the future price direction. If anything, they show the trend hesitation. The oscillator’s ability to diverge from price tells much about the undergoing momentum or the current move’s lack of strength. As a tip, when looking for divergences, try to find two higherhighs or lowerlows that the oscillator doesn’t confirm. Crossing the Middle Range. The example above shows what conservative traders should look at before entering a trade. The bearish divergence gets confirmed by price moving below the lowest value of the previous swing. That is when selling should take place. After all, when dealing with your own money, you want to take all the precautionary measures possible. Besides the two strategies from above, there’s another way that shows how to use stochastic oscillator in Forex. The key to this is to use a trick given by the stochastic oscillator formula. How about splitting the range?

The entire range matters here, not the one between overbought and oversold areas. Having said that, the middle point between one hundred and zero is fifty. We can edit the indicator by right-clicking on the chart area, select it from the Indicators List and choosing the Levels tab. Simply add the 50 value, select the color and style, and it will appear on the oscillator’s window. The idea behind this strategy is simple: use the 50 level as a continuation pattern. It means we should buy when the level gets crossed from below and sell when the oscillator comes from above. Such a simplistic approach fails more than succeeds. But this doesn’t make it unprofitable. Whit risk-reward ratios bigger than 1:2 or 1:2.5 the account grows nicely. The targets for this Forex stochastic oscillator strategy differ with the time frame. On a five-minute chart, smaller targets come with bigger volume. The opposite is true on bigger time frames: volumes drops on behalf of a bigger target. Not once, traders fall prey to false expectations. Everyone looks for the holy grail in trading: find a strategy that works all the time.

Instead, people should focus on a strategy that works MOST of the times. That makes money! Video Example of the Stochastic Oscillator. And now you have the wonderful opportunity to see the Stochastic Oscillator in action for free. Below you will find a video that shows one of my trades with the Stochastic. I managed to match an overbought Stochastic signal with a price bounce from a bearish trend line. Therefore, I shorted the GBPUSD on the assumption that the price is about to decrease. Meanwhile, a Double Top chart pattern was confirmed on the chart, which gave additional support for my short trading decision. See the video for free by entering your details! This article used the standard stochastic oscillator settings to show ways to trade with it. However, the best stochastic settings for day trading are the ones that consider risk management. In trading, this is more important than any trade setup. If you don’t understand the risk, you don’t know the reward. Both of them matter in the end. This is the idea of any oscillator, no matter its name. Even though overbought or oversold levels aren’t specified, it is easy to build them. Likewise, divergences show the right direction when used with any oscillator.

If that is the case, what is stochastic oscillator showing differently than other indicators? What makes it so special? Firstly, it shows a cross. This cross acts as a signal. One cannot say the trade was missed if the cross is in place. Secondly, when the cross forms above the 80 level, you simply don’t want to be long. Or short, if a bullish cross is below the 20 level. When this happens on the five-minute chart, missing it is not a problem. However, on the daily and above, this is a costly mistake. In Forex trading, mistakes translate in losing money. We all want to avoid that.

Last but not least, the Forex stochastic oscillator formula allows for multiple ways to trade it. Either selling a bearish divergence or buying a bullish one, a proper money management system and discipline result in the account growing in time. A trader has the best results when trading follows the rules. Rules, on the other hand, make a trading system and this, in turn, may, or may not be profitable. The profitability degree depends on the indicators used, and the stochastic oscillator explained here is among the best of them. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders.

He was awarded a cup and a certificate at an official ceremony in his university. Awesome Oscillator - AO Indicator. Awesome Oscillator Definition. Awesome Oscillator (AO) is a momentum indicator reflecting the precise changes in the market driving force which helps to identify the trend’s strength up to the points of formation and reversal. For more information how to set the indicator in the terminal please click here. How to Use Awesome Oscillator. Awesome Oscillator Strategy includes 3 ways of trading. Open a sell position when the oscillator is below the zero line forming a peak, and open a buy position when the oscillator is above the zero line forming a gap. Open a sell position when the oscillator forms two peaks above the zero line, where the second high is lower than the previous one. And, conversely, traders watch to open a buy position when the oscillator forms to lows below the zero line with the last one not as low as the previous one. Account crossing the zero line. When the oscillator crosses it from up to down, it is time to open a sell position and when it crosses from down to up, it is time to open a buy position. Awesome Oscillator Trading Strategy. There are three main signals of Awesome Oscillator which may be seen: Three consecutive columns above the nought line the first two of which must be colored red (the second one is lower than the first one) while the third one is colored green and higher than the previous (second) one. Such a formation would be a clear Buy signal whilst inverted and vertically flipped formation would serve as a Sell signal. 2. Nought line crossing.

The histogram crosses the naught line in an upward direction changing its values from negative to that of positive ones. In this situation we have a Buy signal. The Sell signal would be a reversed pattern. The indicator displays a Buy signal when the figure is formed by two consecutive pikes both of which are below the naught line and the later-formed pike is closer to the zero level than the earlier-formed one. The Sell signal would be given by the reverse formation. Awesome Oscillator Formula (Calculation) Awesome Oscillator is a 34-period simple moving average, plotted through the central points of the bars (H+L)2, and subtracted from the 5-period simple moving average, graphed across the central points of the bars (H+L)2. How to use Awesome Oscillator in trading platform. Use indicators after downloading one of the trading platforms, offered by IFC Markets. How to Use Oscillators to Warn You of the End of a Trend. An oscillator is any object or data that moves back and forth between two points. In other words, it’s an item that is going to always fall somewhere between point A and point B. Think of when you hit the oscillating switch on your electric fan. Think of our technical indicators as either being “on” or “off”. Does this sound familiar? It should! The Stochastic, Parabolic SAR, and Relative Strength Index (RSI) are all oscillators. Each of these indicators is designed to signal a possible reversal, where the previous trend has run its course and the price is ready to change direction.

We’ve slapped on all three oscillators on GBPUSD’s daily chart shown below. Remember when we discussed how to work the Stochastic, Parabolic SAR, and RSI? If you don’t, we’re sending you back to fifth grade! Anyway, as you can see on the chart, all three indicators gave buy signals towards the end of December. Taking that trade would’ve yielded around 400 pips in gains. Ka-ching! Then, during the third week of January, the Stochastic, Parabolic SAR, and RSI all gave sell signals. And, judging from that long 3-month drop afterward, you would’ve made a whole lot of pips if you took that short trade. Around mid-April, all three oscillators gave another sell signal, after which the price made another sharp dive. In the chart below, you can see that the indicators could give conflicting signals. For instance, the Parabolic SAR gave a sell signal in mid-February while the Stochastic showed the exact opposite signal. Which one should you follow? Well, the RSI seems to be just as undecided as you are since it didn’t give any buy or sell signals at that time. Looking at the chart above, you can quickly see that there were a lot of false signals popping up. During the second week of April, both the Stochastic and the RSI gave sell signals while the Parabolic SAR didn’t give one. The price kept climbing from there and you could’ve lost a bunch of pips if you entered a short trade right away.

You would’ve had another loss around the middle of May if you acted on those buy signals from the Stochastic and RSI and simply ignored the sell signal from the Parabolic SAR. What happened to such a good set of indicators? The answer lies in the method of calculation for each one. Stochastic is based on the high-to-low range of the time period (in this case, it’s hourly), yet doesn’t account for changes from one hour to the next. The Relative Strength Index (RSI) uses the change from one closing price to the next. Parabolic SAR has its own unique calculations that can further cause conflict. While being aware of why a leading indicator may be wrong, there’s no way to avoid them. If you’re getting mixed signals, you’re better off doing nothing than taking a “best guess”. If a chart doesn’t meet all your criteria, don’t force the trade! Move on to the next one that does meet your criteria. February 9, 2016 Posted by: Roman Sadowski Category: Forex Blog. There is much misunderstanding of technical indicators out there.

Traders tend to use many indicators without researching or knowing what they are and how are they calculated. Even less traders ever bother to test accuracy of indicators they use. You would be very surprise to find out that many of them have less than 30% accuracy but you still use them! This article will cover most important things every forex trader should know about Stochastic Oscillator. Points to cover: 1. You can use stochastics oscillator to measure the speed and momentum of a price over a time period. 2. A low value point to the strong uptrend as much as it points to a strong downtrend. 3. A high value points to the strong downtrend as much as it points to a strong uptrend. 4. Stochastic oscillator works best when used with leading indicators , chart patterns, and volume and price movement. 5. The trend following strategy can be a profitable one to use with stochastic 6. Stochastics oscillator must be paired with multi-frame analysis. Definintion: A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time.

It is one of the earliest technical oscillators in securities trading used to predict future market direction. ‘Stochastic’ is Greek for ‘random’, and in the context of trading, refers to using past actions to forecast a future state. ‘Oscillator’ refers to repetitive variations up or down the equilibrium position. Formula Stochastics oscillator is measured using the %K and %D lines. %K = 100 (C – L14) (H14 – L14) C is the current closing price L14 is the lowest price when looking back at the 14 previous trading sessions H14 is the highest price when looking back at the 14 previous trading sessions %K tracks the most recent market rate for the currency pair. %D = 3 – period simple moving average of %K. It is also called the ‘stochastic slow’ due it slower reactions to market price changes compared to %K. Stochastic Oscillator is an index compiled with recent low and high of the price and put the current price in the context in % terms. Characteristics. #1. Stochastic oscillator is a lagging indicator. 90% of all indicators are lagging indicators , including stochastics. It is important to grasp this concept right from the beginning.

Once you understand, you will position yourself way ahead of other traders out there. It is important to note that. stochastics oscillator is price-driven as opposed to driving the price. All indicators built into a trading platform are being computed based on price data fed into that platform. If price isn’t recorded in the trading software, the indicators cannot be populated. There are four dimensions of the price – Open, Close, High, Low All indicators are a different versions of the same data source. Equation and time sets might change but the core of all of the is the same. To easily verify this, you can go to Meta Editor in Meta Trader4 And open the core files of any lagging indicator you wish. After inspecting the code, you will realize they are all using difference equations but the same core data.

None of lagging indicators you are currently using are capable of predicting future price. They simple cannot! Price is influenced by external factors, not the indicators. Having said that, making correct judgments even some of the time can be very rewarding and Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy. There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. #2. OverboughtOversold levels often indicate a strong trend, not a reversal. First off, there is a wrong belief that stochastic can point to overbought or oversold levels . A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal. There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below 20. To simply test any indicator in real time you can use the visual mode “Strategy tester” within your MetaTrader4 platform. Follow instructions below #1 #2 Select any of the indicators, select symbol, select timeframe, select visual mode and time period, Click start You will now see the price action unfolding on the screen together with the indicator of your choice. It doesn’t take long to see that Stochastic Oscillator does what we expect it to do only half the time! Trader can’t blindly follow overbought or oversold rule. As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly. Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal.

When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis. Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks. Buying would not be a great idea! #3. Stochastic Oscillator must be used in conjunction with other leading indicators. Traders use indicators for technical analysis in order to gain useful additional information. Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy. Look at it this way: by using a single indicator in isolation, you’re basing your entire strategy on just that and nothing else. To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements. Stochastic MUST an add-on to a much larger, sound trading strategy. This is its role! Take a look at the setup below.

Larger trading strategy in this example is a sound price action technique. Trader waits for the price to make higher high at B (after A) He measures the retracement by Fib. The price pulled back to 38% @ point C. The long market entry can be placed here. Stochastic oscillator in this case serves as an additional confirmation of the reversal and plays a part within larger trading strategy. #4. It works best with the trend following strategy. Trend following signals are strong as they take the market’s own movement into account. A basic stochastic trend following signal is a signal line crossover , occurring when the %K line crosses the %D line in confirmation with the trend. When %K (short-term line) crosses below %D (long-term trend) and returns above it, you can consider it an uptrend and a buy signal. The reverse holds true for a downtrend. Trend following is one of the most used strategies in forex trading. Stochastic can be used to enter the market on pullbacks within the trend.

Pullbacks are short-term movements that go contrary to the existing direction of the price trend. If the market is moving above the simple market average – that is, in a bullish environment – you can consider entering long when a pullback occurs. When the price is below the average and a downtrend is on the cards, you will need to wait for short entries on pullbacks occurring in the trend. #5. Always use Stochastic Oscillator on multi-frame. Sometimes traders get confused analysis markets on many time frames at the same time. An hourly time frames may give you bearish signals but your daily or weekly time-frames may show bullish signals. If you wait for the lower time frame to revert to the direction of the larger time-frame, the stochastic will start showing bullish signals on both charts. But this is time-consuming. It is best to use one chart on which you will make decisions and view other timeframes to adjust your bias accordingly. The time dimension offers more confirmation on trend lines to make smarter decisions. Using multiframes initially can cause some confusion, but if you use them properly, you will be able to locate good entry points and make cleaner entries than if you were to use single frames. The above screenshot includes stochastic on a 30 minute, 4 hours and 1day chart in one window. This provides a broader reading on the market for better accuracy.

Trader can line up large timeframe behavior to gain more insight. Ideal entry would be with all stochastics lined up on one side. Download multi-period-stochastic-indicator here. There is much more to trading than just a bunch of indicators on the chart. Trader must show deep understanding of the macro markets and economics first. Indicators should be used as an additional market entry tool, a confirmation rather than a strategy itself. landing_block type=”newsletter” Exploring Oscillators and Indicators: Leading And Lagging Indicators. Indicators can be separated into two main types - leading and lagging - both differing in what they show users. Leading indicators are those created to precede the price movements of a security giving predictive qualities. Two of the most well-known leading indicators are the Relative Strength Index (RSI) and the Stochastics Oscillator.

We will cover the RSI indicator in more detail later on in this tutorial, but for now to get an idea of how it can be used as a leading indicator, take a look at the chart of International Business Machines (IBM) shown below. Notice how the RSI indicator shown at the top of the chart is trending upward while the price of the stock was moving lower. Active traders who were able to spot the divergence between the indicator and the underlying price were able to open a position before the move higher occurred. Entering a position early, or leading a move before others are able to determine what is going on is the primary goal of many who use technical analysis . The majority of leading indicators are oscillators. This means that these indicators are plotted within a bounded range. The oscillator will fluctuate into overbought and oversold conditions based on set levels based on the specific oscillator. Note: An example of an oscillator is the RSI, shown above, which varies between zero and 100. A security is traditionally regarded as overvalued when the RSI is above 70 and oversold when the RSI is below 30. In the case of IBM, you can see how overbought and oversold readings would have allowed traders to anticipate major changes in the price of the company’s shares before the rest of the market took notice. A lagging indicator is one that follows price movements and has less predictive qualities. The most well-known lagging indicators are the moving averages and Bollinger Bands®. The usefulness of these indicators tends to be lower during non-trending periods but highly useful during trending periods. This is due to the fact that lagging indicators tend to focus more on the trend and produce fewer buy-and-sell signals.

This allows the trader to capture more of the trend instead of being forced out of their position based on the volatile nature of the leading indicators. How Indicators Are Used. The two main ways that indicators are used to form buy and sell signals are through crossovers and divergence. Crossovers occur when the indicator moves through an important level or a moving average of the indicator. It signals that the trend in the indicator is shifting and that this trend shift will lead to a certain movement in the price of the underlying security. For example, by taking a look at the chart of Nike Inc. (NKE), you can see that the crossover between the 50-day and 200-day moving averages (shown by the blue circle was a clear signal of the beginning of a major uptrend. (For more on this topic, check out: How To Use A Moving Average To Buy Stocks ) The second way indicators are used is through divergence, which was shown in the example of IBM above. Divergence occurs when the direction of the price trend and the direction of the indicator trend are moving in the opposite direction. This signals that the direction of the price trend may be weakening as the underlying momentum is changing. There are two types of divergence - positive and negative. Positive divergence occurs when the indicator is trending upward while the security is trending downward.

Positive divergence is the type of divergence shown on the chart of IBM above and is a bullish signal that suggests the underlying momentum is starting to reverse and that traders may soon start to see the result of the change in the price of the security. Negative divergence works in the opposite manner and occurs when an indicator starts to trend lower while the price of the underlying security trends upward. Negative divergence is a popular bearish signal that is used by traders for identifying periods where momentum is weakening during an uptrend. For example, notice on the chart of Biogen Inc. (BIIB) below, that the relative strength index was trending downward while the security's price was trending upward. This negative divergence would be used to suggest that even though the price was lagging the underlying strength, based on the RSI, traders would still expect to see bears control of the asset's direction and have it conform to the momentum predicted by the indicator. Indicators that are used in technical analysis provide an extremely useful source of additional information. These indicators help identify momentum, trends, volatility and various other aspects in a security to aid traders when making decisions. It is important to note that while some traders use a single indicator solely for buy and sell signals they are best used in conjunction with price movement, chart patterns, and other indicators. (For related reading, see Technical Analysis Strategies for Beginners) Stochastic Oscillator: A Mechanical Indicator for All Traders. Stochastic Oscillator is almost the most famous indicator among stock traders. As many of the professional currency traders have been professional stock traders in the past and they still trade stocks as well, they are used to use this indicator on their charts. They are somehow addicted to Stochastic Oscillator. The question is whether Stochastic Oscillator is really a good indicator or not? I believe all indicators and even trading strategies are good (1) when you know how to use them properly, and (2) you wait for the strong trade setups. If not, you lose with any trading strategy and indicator.

So, first you have to master your trading strategy and the trading tools and indicators it has, and then you have to wait for the strongest trade setups and ignore the weak and questionable ones. If so, you will make profit, no matter what trading strategy and indicator you are using. If not, you will lose, no matter you have the best trading strategies, indicators, software, and… . Stochastic Oscillator is not an exception. Many traders know this indicator as a money sucker. But I believe all indicators, even candlesticks that are my favorite trading tools, can be terrible money suckers when you don’t know how to use them properly, and when you don’t wait for them to form good and strong trade setups. To become a consistently profitable trader, first you have to master your trading strategy and the indicators it has. What Is Stochastic Oscillator Indicator? Stochastic Oscillator is an oscillator that records the price fluctuations and speed which is known as momentum. The Stochastic Oscillator formula doesn’t tell you whether you should use this indicator or not. Any indicator has a special formula which is different from the other indicators. What has made Stochastic Oscillator different from the other indicators is that, it doesn’t roughly follow the price, like what many other indicators do. It tracks the speed of the price changes which is also known as momentum.

The most important point here is that, as the momentum changes before the price changes its direction, you can make big mistakes if you enter the market right after Stochastic changes its direction. This is how most traders lose when they use Stochastic, whereas the problem is in the way they use this indicator, not in the indicator itself. The most important part of Stochastic is the %K parameter. It is set to 14 by default and most stock traders use this settings, but on MT4 platform it is set to 5. However, it doesn’t make a big difference actually, at least in the way that I am going to show you to use it. Like RSI, Stochastic Oscillator goes to overbought and oversold areas. When the price goes up for a few candlesticks, Stochastic Oscillator goes to the overbought area which is above the 80 level. When the price goes down for a few candlestick, Stochastic Oscillator goes to oversold area which is below the 20 level. Some traders are used to change these levels to 70 and 30 to filter out some of the false trade setups. However, this is not a good idea and we really don’t have to do that: As I mentioned earlier in this article, Stochastic Oscillator’s application is completely different from what most traders think. Stochastic Oscillator is an indicator to follow the price speed, not the price movements. As you see on the above chart, Stochastic is used to go up and down between the 20 and 80 levels.

Most traders think that they should buy when Stochastic Oscillator changes its direction and goes up from the oversold area, and they should sell when it changes its direction and goes down from the overbought area. This is a big mistake, because the price can keep on going down for such a long time, even when Stochastic goes up and leaves the oversold area. It can also go up for so many more candlesticks, even when Stochastic goes down and leaves the overbought area. How to Use Stochastic Oscillator. Here, I am going to teach you how to use Stochastic Oscillator in a completely mechanical trading system. If you like to use this system, you have to forget everything you already know about this indicator. Try to use it in a completely new way which is in fact the real way that Stochastic Oscillator has to be used. Stochastic Oscillator cannot be the only indicator that tells you when to buy and sell. It was not created to do that. It has to be used along with the price actions. If you look at Stochastic Oscillator only to get in or out of the market, you will lose, even if you have the other Oscillator indicators like RSI and MACD on your charts. It is almost the same with all the other Oscillators. You have to use them along with the price actions. It is the price action that has to give you a buy or sell signal first. Then you have to refer to the indicator and find out whether it also confirms the price action or not. – What Is the Price Action I Am Talking About?

Experience shows that in case of Stochastic Oscillator, nothing is better than support and resistance breakouts. However, to keep the trading system as simple and mechanical as possible, we mainly focus on the support and resistance levels . I will also show you some examples from the support and resistance lines . So, here is what you have to do: 1) Open a price chart and add the Stochastic Oscillator on it. You can make the signal line invisible, because we only need the main indicator line. If you are using MT4 platform, then leave the parameters to have the default settings which is 5, 3, 3. This is how you can make the signal line invisible: 2) Refer to the weekly chart and zoom out to see the candlesticks as short and thin lines. This helps you to see the strong, valid and most visible support and resistance levels better. I said weekly chart because this system works much better on this time frame and also the monthly. Indeed, all systems work on the longer time frames better and this system is not an exception. However, I will show you some examples of using this system on the daily chart, specially to follow the trends. 3) Look for the most recent and strongest support and resistance levels and plot horizontal lines belowabove them. As you see on the below chart which is related to EURUSD weekly chart, there are two strong support levels that are so close to each other.

One is at 1.1884 and the other one at 1.2041: 4) Wait for one of the candlesticks to close above a resistance or below a support level. That means the price action we were looking for, is formed. 5) At the same time that a candlestick closes above a resistance or below a support level, Stochastic Oscillator has to be in the overbought or oversold area respectively. A long trade setup or buy signal forms when (1) a candlestick closes above a resistance level and (2) Stochastic Oscillator is in the overbought area at the same time. A short trade setup or sell signal forms when (1) a candlestick closes below a support level and (2) Stochastic Oscillator is in the oversold area at the same time. It is as simple as that. The most important thing in this trading system is that you locate the strongest and most visible highs and lows to plot the resistance and support levels. You should be careful not to take the weak levels breakouts. Let’s get back to the above screenshot as an example. As you saw, we located two strong support levels at 1.1884 and 1.2041. According to what I explained above, if any of the candlesticks closes below one of these support levels while Stochastic Oscillator is in the oversold area, we will have a short trade setup: Below, is a resistance level on GBPJPY weekly chart: And this is how the resistance level was broken and a long trade setup formed: Another long trade setup on EURAUD weekly chart: – Why Do We Need the Stochastic Oscillator Confirmation?

Almost in all the strong support and resistance levels breakouts, Stochastic Oscillator is already where it has to be. It is in overbought area when a strong resistance level, and in oversold area when a strong support level, gets broken. So, Stochastic Oscillator confirms 100% of the strong supportresistance levels breakouts. If so, then we don’t have to have it on the charts. We just need to wait for the strong supportresistance levels to get broken, and so we enter. That is right, but we take the Stochastic Oscillator confirmation to filter out weak levels breakouts. Novice traders usually have a hard time locating the valid and strong levels. They don’t know how to zoom out to see the bigger picture of the markets, the strong highs and lows, and so the strong breakouts. They don’t know how to do it technically. Also, they are not patient enough to wait for the strong levels to form and get broken. So, they locate weak and invalid levels and get in after their breakout. It is when Stochastic Oscillator can prevent them. If you are skilled enough in locating the strong and valid levels, then you don’t need to have the Stochastic Oscillator indicator on your charts. If you like to have it, then you should use it the way I explained above. False Long Trade Setup Breakout: Most traders think that they have to go long when Stochastic Oscillator turns around to go up and leave the oversold area.

If you do so, you will have so many losing positions, because the price can keep on going down even when Stochastic Oscillator turns around and starts going up from the oversold area. It can go up a little and then go down to reach the oversold area again. Sometimes it repeat this for several candlesticks. It is the same when Stochastic is in the overbought area. That is how most traders who use Stochastic, lose a lot of money. They want to hit the top and bottom of the movements, and so they go long or short, as soon as Stochastic leaves the oversold and overbought areas. That is why professional traders say that trading is not about buying low and selling high, or selling high and buying low. Trading is about buying high and selling higher and selling low and buying lower. The reason is that first you have to wait for a party to take the full control. You should go long only when you are sure that bulls have taken the full control and will take the price higher. You should go short only when bears have the full control. A bullish candlestick that causes the Stochastic Oscillator to turn around and leave the oversold area, doesn’t mean that bulls have the full control. If you get in because of that, most probably you will lose. Most traders who use Stochastic Oscillator indicator lose because of these mistakes, and then will call the indicator “money sucker” after a while. Stochastic is not a money sucker. It is those traders who don’t know how to use it properly.

As you saw, you should enter only when Stochastic Oscillator is in overbought or oversold area. You have to stay away from the market when Stochastic Oscillator turns around and is moving between the 20 and 80 levels. This is how it works. Where to Place the Stop Loss and Target Orders? When you go long, you should place the stop loss a little below the low price of the candlestick which has broken above the resistance level. When you go short, you should place the stop loss a little above the high price of the candlestick which has broken below the support level. That is a reasonable stop loss in this trading strategy. When the breakout candlestick is too short, you can have a wider stop loss, probably abovebelow the highlow price of a few candlesticks before the breakout candlestick. It depends on the case and the trade setup.

Target order is a more complicated discussion in any trading system. Entry and stop loss can have clear and strict rules, but the question which is harder to answer is the exit. Where is the best level to get out? Your target order can be from x1 to x10 of your stop loss. I suggest you to move the stop loss to breakeven when the price moves accordingly for x1 or x2 of your stop loss size. When you move the stop loss to breakeven, then there is no risk to hold the position. I suggest you not to get out with less than x5 profit. If you choose the strong and valid levels and then you enter on time after the breakout, you can make thousands of pips. Of course you have to follow the longer time frames if you want to be such a profitable trader. To have a good understanding from the best exit levels, you have to know many other things. When you are following a trend, you should know about the Elliott Wave Theory to know when the trend is exhausted and it is the best time to exit. More professional traders have learned to enter based on a shorter time frame trade setup, but hold the position based on longer time frame, to maximize the profit as much as possible. For example, they get in based on the daily chart, but then hold based on the weekly and monthly, when they see that the trade setup that was formed on the daily chart, turned to a strong trend not only on the daily, but also on the weekly and monthly charts. Novice traders need some time to learn all these things. When they are learning, they can still enter the markets based on the strong trade setups I explained above, and enjoy collecting x5 profits.

They will learn to let their profit grow even more, when they become more experienced. – Trading the Support and Resistance Lines Breakouts. In addition to support and resistance levels , you can trade the support and resistance lines through this system and using the Stochastic Oscillator indicator. However, you have to note that locating and plotting the valid and strong support and resistance lines needs more experience and knowledge. It is a tricky task compared to support and resistance levels. You will have more losing positions if you want to trade the support and resistance lines. The same rules have to be applied here too. You can go long when a candlestick breaks above a resistance line and Stochastic Oscillator is in the overbought area at the same time. In case of the short positions, a candlestick has to close below a support line, and the Stochastic Oscillator has to be in the oversold area at the same time. A False Long Trade Setup: The below chart shows that a candlestick closed above a resistance line while the Stochastic Oscillator had not reached the overbought area. As you see, the price went down and retested the broken resistance line strongly after the resistance breakout: A True Long Trade Setup: The below screenshot is self-explanatory. A good and valid resistance breakout which is later confirmed by valid and precise retesting, while Stochastic Oscillator is where it has to be. As you see, Stochastic Oscillator can be a great tool, if used properly: A Good and Valid Short Trade Setup: – Following the Trends. Trading the strong levels breakouts along with Stochastic Oscillator confirmation is a great way to follow the strong and continued trends. When it is proven that there is an ongoing strong trend, you can enter after the smaller levels breakouts on the same trend. If you set a proper stop loss in the way that was explained above, you will get out with a small loss in case the trend reverses. However, you will have a strongly profitable position if the trend continues.

As you see on the below screenshot, a resistance breakout ended to the too strong uptrend on USDJPY weekly chart (#1). At the middle of the way, a resistance level formed at 103.726. It got broken later (#2), but then the market went sideways and hit the stop loss. After that, another resistance level formed at 105.433 that got broken several candlesticks later (#3), and although the price retested the level, it went up over 1800 pips after that. So those who had missed the trend, could get in at the middle of the way. The below screenshot shows the support levels that you could trade during a strong downtrend on EURUSD daily chart. Although your stop loss can get hit sometimes, you can recover the losses through the several winning trades that a strong trend can give you: Why Did I Write This Article? I wrote this article to give a detailed and complete answer to those traders who always ask about Stochastic Oscillator, its settings and the best way to use it. As I explained at the beginning of this article, Stochastic Oscillator is a popular indicator among traders, specially the stock traders. However, there are very few traders who know how to use this indicator properly, and so, 99% of those who use this indicator, always lose. In this article, I introduced a simple and mechanical, yet strong, profitable and effective way to enter the markets using the price action (which is the best and most effective way to trade), and Stochastic Oscillator confirmation. Those traders who like to have more trading opportunities can use this system along with the other systems they use. If they follow the weekly and monthly charts, all they have to do is spending half an hour every weekend. You can locate the forming and formed trade setups, and then entering the markets at the market open on Sunday afternoons. Just before you go, did you check This System? Make sure to do it now, otherwise you will regret. Read related articles: + Click Here to learn who we are and why this site was created. + Click Here to receive our eBook for free. WOW… great explanation. I have never seen an article like this before about Stochastic Oscillator.

Thank you Boss. Wow! You are a wealth of knowledge, Chris! Thank you for this article. Very simple and powerful! Great,,LOved to see article about stochastic Thanks Chris Sir. Thank you Chris for such instructive articles. But I just want you to note that when I see the Forum I see other trading systems like Fibonacci, Ichimoku, Elliot and the indicators that members are using to trade. You have always said that we do not need any other system but Candles and Bollinger Bands and yet I see that people forget this and like to complicate things. May I ask you to attract members’ attention to your main system by completing the ” Best trading system …” which is used on shorter times frames. Because doing so we all focus on one thing. Correct me if I’m mistaken but I think finishing a system completely will have more benefit.

Thanks for your time and everything ?? You are absolutely right. I am sure most members use one system to master it. On forums, people can discuss too many different topics and ask for the other members opinions. We cannot prevent them ?? I have tried to suggest that people do not post topics called “too strong XXX” because it is misleading when the strategy being used is not BB+Candles. It might be a good idea to have separate areas in the forums for LuckScout strategies and non LuckScout strategies. “Correct me if I’m mistaken but I think finishing a system completely will have more benefit.” “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” - Bruce Lee. Thank you Chris for this new lesson. have a good week. Great post.

Very educational. Learned something new once again. Thank you Chris. Chris dont know what to say but im one of them who learn somewhere the wrong way of using this indicator and what I could pick up is it hardly goes together with MACD it was confusing me. Thanks a lot. I learned more in a few months with LuckScout than 3 years with everyone else! Thank you a thousand times, Chris! What a comprehensive article. Just made me realize I didn’t know how to use Stochastic after all. Thank you Chris! Thank you very much Chris. I never thought about using stochastic, but this can be a great help for me to identify the stronger SR. Since I found LuckScout, I learn something new every day. Thank you Chris to share your knowledge with us. Thanks Chris, for adding my knowledge about Stochastic indicator. Definitely it will help. Thanks a lot. Hi Chris, I am completely speechless. No language known to me to appreciate you properly. Its an excellent article and best to my known. I salute you thousand times for your great explanation along with great examples.

Your articles are the best remedy to wash away the dirty thinking from the brain. Best regards. Azhar. hi chris wonderful and useful article again. i should say i was completely wrong to use stochastic indicator so far. thanks a lot for teaching us. i do not know how to be thanks. a question: as i understood we should use stochastic just in weekly and monthly time frames and locate set up on long time frames and enter to market based on the same time frames. am i right? if so, why we can not enter to market in daily time frame? or we use stochastic in locating the set up on daily time frame and enter to market in the same time frame? in the last screenshot you show it is possible to use the stochastic in daily time frame. thanks a gain metor. You are welcome. Of course you can use the indicator on the daily time frame too. You will have much better results with the weekly time frame, and monthly. Wow, with this knowledge, i am a better trader now. God bless you Chris. A very helpful and explanatory article which has opened my eyes to an indicator I always thought should be useful but didn’t really know why until this moment.

Thank you for that insight. wonderful article chris. will never be dumb money again. used to buy in oversold areas when the signal line going up. why? you my ask. coz the so-called ‘gurus’ taught us so. this is topnotch classified infor I tell u. I’ll must rethink about using indicators for brakeouts. Very useful article for our better performance and confidance. Thank you Chris. Although I personally dont use oscilators and only candlesticks & BB (LuckScout :), its amazingly educating to read anything you write Chriss. Thank you my teacher. Please Don’t post my comment. Instead of “What This Article Was Written?”, I think it should be “Why This Article Was Written?”. If I am wrong, please ignore.

Thank you so much. My error again: I edited the article after it was finished, but published the non-edited version ?? Please kindly don’t hesitate to inform me about the errors like that. thanks Chris . but would you allow me to left up my hat salute you for this valuable information. coz i was thinking like most traders buy when it’s in the oversold area, and sell when it’s on the overbought. Thank you Chris. Great article. Great help for using stochastic oscillator. I have few questions regarding this: 1.Are EURNZD, GBPJPY and GBPAUD weekly formed or forming long trade setup according to above trading system?

2.Can we use stochastic oscillator with Candlestick+Bollinger band trading system to confirm trade setup? 3.What is the correct pronunciation of stochastic? 1. I am going to analyze them hopefully today. I will send you the notification email. 2. I don’t think so. Stochastic is usually between 20 and 80 levels when candlesticks + BB setups form. That doesn’t mean anything. Thank you Chris! Really, really nice and instructive article!! If we have taken the Stochastic Oscillator confirmation to filter out weak levels breakouts , Do we still need to wait the price to retest the broken line again for confirming that the resistancesupport line is valid or not ? No, you don’t have to. However, the price usually retests on the weekly chart, even by the next 1-2 candlesticks. That is really good because you will have plenty of time to enter after the setup. This is one of the advantages of using the long time frames. Above, you can see how the next two candlesticks retested when the resistance line was broken on USDJPY weekly chart. Thx so much Chris. As someone that uses the stochastic and trades on s&r levels i have always wondered why the trades i look at often go my way first and then go the other way. Many times i have not gone in a trade because the stochastic i thought was not agreeing with what i was seeing.

Now i understand why…thx again. Thank you Chris, A very timely article as l had installed the stochastic indicator on my charts 2 weeks ago, but with little joy. Great article Chris. Thanks. Chris, I am learning a lot with your daily articles. For a novice trader, like me, your teachings are the holly grail! Thank you a lot for sharing your knowledge and helping us understand how trading works ?? Me too Learning Everyday ?? Very clear and informative thank you Chris and thank you for your time. Kind regards, Linz. hi chriss thank you for real learing. I am getting very confused. With all of these indicators out there I seem to be just getting to know one, when another one is introduced. Chris, can you tell me what are the basic indicators we need?? I am 68 and school is a long way behind me. Thank you for your tireless work. No need to be confused. You can use Stochastic if you want, the way it was explained above.

You don’t need any other indicator. If I can add a further question please Chris? Basically you have said that Stochastic’s should only be used as a rule in confirming support resistant breakouts (selling lowerbuying higher) and should not be relied on for confirmation of reversals (selling high buying low).Is that right? In my weekly screenshot the far left is your illustration of buying higher, further to the right are BB breakouts and Stochastic confirms reversals too. Stochastics should be ignored in these instances Chris is that what you mean? Stochastic confirms the reversal signal formed by candlesticks always, when the candlestick pattern is strong. If the candlestick pattern is not strong enough and you enter just because stochastic confirms the reversal, then most probably you will lose. That is why I mentioned that the price action has to be the first that gives you the signal. Please let me know if that answers your question. Yes it does. I understand Stochastic’s has to be in oversold or overbought areas in both instances of strong continuing trends and reversals but always secondary in confirmation of the strong price action signal. Clear now thank you for your clarification. Kind regards. How do you tell when a supportresistance level is strong? They have to be based on the most visible highs and lows.

Zoom out and you will see them. Ask me when you don’t know whether the highlow you have found is strong enough or not. In the last screenshot of the article, there are many supportresistance levels drawn. Are they really strong enough? I was drawing lines only on the big highs and lows that happen maybe once a year or even less frequent. Am i exaggerating and do i need to be more forgiving and include the smaller levels too? No, they are not too strong. They are just to follow the too strong downtrend on the daily chart. Thank you very much for this knowledge Chris.. There is so much information out there about different oscillators and how to use them it’s always difficult to know if you are ever using them the right way or not. Thanks Chris for taking the time to explain things in a way that easy to understand and put to practical use. As always great article. Thanks so much Chris for this article.

So insightful and educative. I concluded with quit this indicator its a no no for me. I questioned you-Can we use stochastic oscillator with Candlestick+Bollinger band trading system to confirm trade setup? I have already answered your questions. You wrote-I don’t think so. Stochastic is usually between 20 and 80 levels when candlesticks + BB setups form. That doesn’t mean anything. Your reply to Linz-Stochastic confirms the reversal signal formed by candlesticks always, when the candlestick pattern is strong. If stochastic is usually between 80 and 20 levels then how would it confirms the reversal signal formed by candlesticks pattern. Actually sir i got 2 different reply for my question that’s why i am little bit confused. I think sir you know what i want to ask. Please reply. When I mentioned “Stochastic confirms the reversal signal formed by candlesticks always, when the candlestick pattern is strong…” I meant an indicator that always confirms the setups, don’t have to be used. We use an indicator to filter out the bad setups. It doesn’t have to be used when it cannot do that.

Both the answer I gave you and the one I gave Linz are the same. Sir, The below paragraph is from the above article. I think we have to change the wordings overbought and oversold. The same rules have to be applied here too. You can go long when a candlestick breaks above a resistance line and Stochastic Oscillator is in the oversold (overbought) area at the same time. In case of the short positions, a candlestick has to close below a support line, and the Stochastic Oscillator has to be in the overbought (oversold) area at the same time. You are right. Thank you. Thanks so much Chris, We learned a lot from you to which I am grateful for your contribution of knowledge and helping novices by giving them the profitable strategies. Having said that I would request you to highlight your thoughts


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