{"@context":"https:\/\/schema.org\/","@type":"BlogPosting","@id":"https:\/\/learnpriceaction.com\/stochastic-oscillator-indicator\/#BlogPosting","mainEntityOfPage":"https:\/\/learnpriceaction.com\/stochastic-oscillator-indicator\/","headline":"Stochastic Oscillator Indicator: How to Use in Your Trading","name":"Stochastic Oscillator Indicator: How to Use in Your Trading","description":"Different kinds of indicators have been developed to help us confirm the quality\u00a0of a certain chart pattern or build\u00a0our own buy and sell signals. If you are\u00a0looking for a technical investment analysis tool that lets you determine where a trend might be ending, then stochastic oscillator is what you are looking for.\u00a0\u00a0 Here’s what you […]","datePublished":"2018-10-23","dateModified":"2025-02-14","author":{"@type":"Person","@id":"https:\/\/learnpriceaction.com\/author\/piphunter\/#Person","name":"Pip Hunter","url":"https:\/\/learnpriceaction.com\/author\/piphunter\/","identifier":1,"image":{"@type":"ImageObject","@id":"https:\/\/secure.gravatar.com\/avatar\/bfb6b7956e1276e203f89cbb148345a03a0885f7f88453a649e15da4592f4b35?s=96&d=wavatar&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/bfb6b7956e1276e203f89cbb148345a03a0885f7f88453a649e15da4592f4b35?s=96&d=wavatar&r=g","height":96,"width":96}},"publisher":{"@type":"Organization","name":"Learn Price Action","logo":{"@type":"ImageObject","@id":"https:\/\/learnpriceaction.com\/wp-content\/uploads\/2018\/09\/Learn-Price-Action-Logo.png","url":"https:\/\/learnpriceaction.com\/wp-content\/uploads\/2018\/09\/Learn-Price-Action-Logo.png","width":600,"height":60}},"image":{"@type":"ImageObject","@id":"https:\/\/learnpriceaction.com\/wp-content\/uploads\/2018\/09\/Stochastic-indicator-fb.png","url":"https:\/\/learnpriceaction.com\/wp-content\/uploads\/2018\/09\/Stochastic-indicator-fb.png","height":630,"width":1200},"url":"https:\/\/learnpriceaction.com\/stochastic-oscillator-indicator\/","about":["MT4 \/ MT5 Indicators and EA's","Price Action & Technical Analysis","Stock Market and Forex Lessons","Trading Strategy Guides"],"wordCount":1336,"articleBody":"Different kinds of indicators have been developed to help us confirm the quality\u00a0of a certain chart pattern or build\u00a0our own buy and sell signals. If you are\u00a0looking for a technical investment analysis tool that lets you determine where a trend might be ending, then stochastic oscillator is what you are looking for.\u00a0\u00a0Here’s what you should know about stochastic oscillator.NOTE: Get Your Free Stochastic Oscillator Indicator PDF Download Below.  Table of ContentsToggleWhat is Stochastic Oscillator?Stochastic SignalsTrend FollowingStrong TrendsBreakout TradingTrend ReversalsDivergenceWhat Stochastic Settings Should be Used?\u00a0What Markets are Stochastic Oscillator Used?\u00a0How to Use the Stochastic Oscillator in Your Trading?\u00a0How to Use the Stochastic Oscillator with Price Action and other Indicators?\u00a0Stochastic Oscillator with Price action\u00a0Stochastic Oscillator with MACD\u00a0Stochastic Oscillator with RSI\u00a0RecapWhat is Stochastic Oscillator?Developed in the 1950s, the stochastic oscillator\u00a0is a momentum indicator that measures the relationship between a\u00a0closing price of\u00a0the\u00a0security to its price range over a given period of time.Using the process of stochastic oscillator helps traders determine the best time when to buy or sell\u00a0the\u00a0security.\u00a0It helps a trader predict price swing turning points by comparing\u00a0the\u00a0security’s closing price to its price range.\u00a0This\u00a0type of indicator\u00a0uses support and resistance levels.\u00a0\u00a0 Stochastic SignalsThere are a few main strategies you can use the stochastic oscillator to find solid trade signals in the market that include;\u00a0Trend FollowingThe trend is still valid as long as the stochastic keeps crossed in one direction. Strong TrendsStick with the trend when stochastic is in the oversold\/overbought area. Do not fight it.\u00a0 Breakout Trading If the stochastic suddenly accelerates in one direction and the two stochastic bands are widening, then it can determine\u00a0the start of a new trend. Trend ReversalsWhen a stochastic is changing direction and leaves the\u00a0areas of where the overbought\/oversold occurred it may indicate a new reversal.You can also combine moving averages or trend-lines on the stochastic to confirm this as we will discuss in a moment. DivergenceWith every momentum indicator, divergence is important as it helps show potential trend reversals. What Stochastic Settings Should be Used?\u00a014 periods are\u00a0the default settings\u00a0of stochastic oscillator.The 14-period\u00a0can either be days, weeks, months, hours, or even an intraday time frame. The next one is a 3-day SMA default settings for the %D.\u00a0The stochastic oscillator has two numbers (%K and %D) which is explained below.\u00a0\u00a0\u00a0What Markets are Stochastic Oscillator Used?\u00a0The best way to trade the stochastic oscillator is in a ranging market rather than a trending market.\u00a0Trending markets require lagging indicators such as\u00a0MACD (simple, weighted, exponential moving average are also in this category) as it will keep you in a trend as long as the trend remains intact.Moving averages tend to flatten in a sideways market and offer no useful information, thus lagging indicators are deemed useless in a trading market.Ranging markets are tricky to trade because despite using oscillators, there will still be an increased frequency of signals, both buy and sell. That is why the use of stochastic is best in a ranging market.How to Use the Stochastic Oscillator in Your Trading?\u00a0Originally the use of the stochastic indicator was to follow the momentum of a price, however, its current use is to identify\u00a0an overbought\u00a0and oversold security. To determine if the security is overbought or oversold, the stochastic is scaled from\u00a00 to 100.\u00a0\u00a0\u00a0As you can see from the image above, there are two lines\u00a0referring to\u00a0Overbought and Oversold.\u00a0The blue line in the chart above is the %K line, and the orange line is your %D line.\u00a0The security\u00a0is considered as\u00a0overbought when the stochastic lines are above\u00a080\u00a0(green line in the chart above).\u00a0When the chart indicates that the security is overbought, it means that it\u00a0is expensive or it is\u00a0the best time to sell a security.In\u00a0contrast, if the stochastic lines are below\u00a020\u00a0(red line in the chart above), it means that the security is oversold.When the chart indicates\u00a0that\u00a0the\u00a0security is oversold, it means that it is cheap and worth\u00a0buying. You can calculate the stochastic oscillator by determining two numbers.As shown above, the\u00a0FIRST\u00a0is a formula,%K = 100 (C \u2013 L of N) \/ (H of N \u2013 L of N)As mentioned before, 14-period is the default setting of stochastic oscillator, meaning that the value of N is 14 and 3 for the %D.The\u00a0SECOND\u00a0factor,%D which is a 3-period moving average of %K.The formula for\u00a0%D line\u00a0is\u00a0%D = 100 X H3 \/ L3.\u00a0The\u00a0numbers are\u00a0then plotted on a graph\u00a0side by side so that analysts may look for fluctuations between 0 and 100. How to Use the Stochastic Oscillator with Price Action and other Indicators?\u00a0Stochastic Oscillator with Price action\u00a0The use of stochastic oscillator is best with price action when looking for support and resistance levels. To find those levels, you use the stochastic indicator as a guide and price action to tell us when the markets are either overbought or oversold at any given time using the one-hour chart and confirming it on the 4-hour chart.\u00a0\u00a0As\u00a0shown\u00a0above in the 1-hour chart, we can see a swing low and a swing high. Notice that in the stochastic indicator that it is overbought. After that, we move to the 4-hour chart.\u00a0\u00a0If the 1-hour and the 4-hour chart indicate that it is overbought, then that becomes a very high probability setup to trade.\u00a0\u00a0 Stochastic Oscillator with MACD\u00a0The MACD \u2013 Moving Average Convergence Divergence indicates price trends and direction, whilst the stochastic oscillator compares a stock’s closing price to its price range over a period of time.This is what makes\u00a0these\u00a0two indicators\u00a0work well together because stochastic compares a stock’s closing price to its price range over a certain period of time, while the\u00a0MACD is the formation of two moving averages diverging from and converging with each other.\u00a0\u00a0\u00a0 When using\u00a0these\u00a0two indicators, look for the bullish crossover to occur within two days of each other. The crossover typically occurs below the 50-line\u00a0on the stochastic to get a longer price move.Preferably you might want the histogram value to move higher than zero within the two days you placed your trade.\u00a0 Stochastic Oscillator with RSI\u00a0The use of stochastic RSI in technical analysis is to provide a stochastic calculation to the Relative Strength Index (RSI).In short, stochastic RSI indicator is an indicator of an indicator.This indicator ranges between 0 and 1 which is then plotted as a line. Rather than\u00a0standard price\u00a0data, it is\u00a0created by applying the formula of a stochastic oscillator to a set of RSI values.The difference of using the stochastic RSI\u00a0is that it improves sensitivity and generates a higher number of signals than\u00a0the traditional indicator.\u00a0You can calculate stochastic RSI by using this formula.\u00a0StochRSI\u00a0= (RSI \u2013 Lowest Low RSI) \/ (Highest High RSI \u2013 Lowest Low RSI)\u00a0 The stochastic RSI\u00a0doesn’t always look similar to the price, meaning it\u2019s a derivative of price.An indicator is considered as oversold when the value drops below 0.20, meaning that the RSI value is trading at the lower end of its range and that the short-term direction of the underlying security may be nearing a correction.On the other hand, a reading above 0.80 indicates that the RSI may be reaching extreme levels and you can use it to\u00a0signal a\u00a0pullback in the underlying security.\u00a0\u00a0RecapThe stochastic oscillator provides trade signals to let you know where the trend might be ending.\u00a0You can use it in many different ways, such as overbought\/oversold levels, divergences, and bull\/bear trade setups.Many traders often misinterpret the stochastic indicator and it is an indicator that need practice to perfect.\\NOTE: Get Your Free Stochastic Oscillator Indicator PDF Download Below."}