The indicator called Stochastic is an oscillator. It helps to follow the asset’s price movements and to predict the reversal of the trend. It also shows divergencies. Let’s take a closer look into it.
Key Takeaways🔑
| →The Stochastic indicator is a versatile tool for predicting potential trend reversals. |
| →It helps identify overbought and oversold market conditions. |
| →Stochastic divergence can be a strong indicator of an upcoming trend change. |
Contents
How to attach the Stochastic indicator to the chart on the Olymp Trade platform
Firstly, log into the Olymp Trade account. Choose the preferable asset and click on the Japanese candlesticks chart. Next, click on the indicators icon and search for Stochastic. You will see a new window with the Stochastic Oscillator.
The Stochastic indicator is composed of 2 lines. It oscillates between 0 and 100. The first line (%K) displays the present closing price for a specified price range. The second line (%D) is the simple moving average and its calculations are based on the first line.
Now, what Stochastic’s parameters are.
The default period of the first line (%K) is fourteen and the color is blue. The period of the other one (%D) is 3 and the color orange. You can change the period and the color of the lines if you wish. We recommend, however, to leave the settings as they are.
How to use the Stochastic indicator for trading at Olymp Trade
There are two possible manners of utilizing the Stochastic Oscillator in your trading.
Determine when the market is overbought or oversold.
In the indicator’s window, you can see two other lines (except the Stochastic lines.) The green one at level 20 and the red one at 80. When the indicator’s lines cross line 80, it means the asset price is overly high. The moment when you should enter a sell position is when the blue %K line intersects the %D line and begin to move below it. Now you can be pretty sure the trend will reverse.
The situation is quite similar to the other end of the graph. If the Stochastic Oscillator drops below 20, so the market is oversold, wait for the %K to intersect the %D and then order a long buy trade.
Pros and Cons 👍👎
Pros:
- Stochastic can help predict potential trend reversals.
- It’s particularly effective in identifying overbought and oversold market conditions.
- Can highlight divergence with price action, indicating possible trend shifts.
Cons:
- May generate false signals in volatile markets.
- Should be used with other indicators for better accuracy.
- The default settings might not be suitable for all market conditions or assets.
| Stochastic Parameters | Purpose |
|---|---|
| %K Line | Indicates the current closing price for a specified price range. |
| %D Line | A simple moving average based on the %K line. |
Utilization of divergence between Stochastic Oscillator and price
We are talking about divergence when the asset’s price compared to the indicator lines are not heading in the same direction. It usually happens together with the support/resistance level break. And then it is a signal for you, that a fresh trend in the opposite direction may start to develop.
The Stochastic indicator is a pretty awesome versatile tool that helps you to spot a potential trend reversal. Go straight to your Olymp Trade demo account and take your time to practice how to use it. Share your experience with us. Use the comments section below.
Best of luck!
Q&A Section 💡
- Q: How does the Stochastic indicator help in trading?
- A: The Stochastic indicator helps traders identify potential trend reversals and overbought or oversold market conditions.
- Q: What does divergence in the Stochastic Oscillator indicate?
- A: Divergence between the asset’s price and the Stochastic Oscillator suggests a potential trend reversal.
- Q: What are the default settings of the Stochastic Oscillator?
- A: The default settings are 14 for the %K line (blue) and 3 for the %D line (orange).
- Q: Can the Stochastic Oscillator be used on its own?
- A: While useful, it’s often better to use the Stochastic Oscillator alongside other indicators for increased accuracy.
- Q: What does it mean when the Stochastic Oscillator crosses the 80 or 20 level?
- A: Crossing the 80 level suggests the asset is overbought, and crossing the 20 level suggests it’s oversold. Both can be early signals of a potential trend reversal.