How to use the Stochastic Oscillator to Identify the Trend Reversals on Olymp Trade

Stochastic featured image

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.


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.

How to add stochastic oscillator to the chart
How to add Stochastic to the chart

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.

Parameters of stochastic oscillator
Parameters of the stochastic oscillator

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.

Oscillators lines crosses in overbought-oversold areas
Oscillator lines cross in overbought-oversold areas

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.

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.

Bullish divergence
Bullish divergence

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!

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Bart Bregman

Full time day trading, and helping out with Olymp Trade wiki in my spare time to create an awesome platform for beginners. I'm a digital nomad that travels the world while working from everywhere!

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