Stochastic Oscillator

In technical analysis of securities trading, the Stochastic Oscillator is a momentum indicator that uses support and resistance levels. The term stochastic refers to the location of a current price in relation to its price range over a period of time. This method attempts to predict price turning points by comparing the closing price of a security to its price range. Stochastic Oscillator is one of the main indicators used in FXLORDS’ Forex Trading Signals.

The Stochastic Oscillator compares the closing price with the price range for the same financial instrument over a certain period of time. The Stochastic is plotted in the form of two curves. Which are the percentage of K, and the moving average of the percentage K, line D. Usually, the K line is displayed as a solid line and D as a dotted line.

The signal to act occurs when there is a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom. Since plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.

There are several ways to interpret the Stochastic Oscillator. The most common are:
– Buy when the Stochastic drops below certain value (for example 20) and then rise above this level. Apparently, we can also sell when the Stochastic rises above a certain level (for example 80) and then drops below it

– Buy when the K line rises above the line D, and sell when the K line falls below the D line.
– Find deviations, for example: when the price continues to develop a series of higher highs and the Stochastic fails to exceed previous levels.

An event known as “stochastic pop” occurs when prices break out and keep going. This is interpreted as a signal to increase the current position, or liquidate if the direction is against the current position.