Ever since the inception of financial exchanges, offering a platform for both seasoned bankers and the public to secure consistent profits, a plethora of diverse instruments has emerged. Initially, these comprised intricate formulas meticulously calculated by financiers manually.
The advent of electronic trading marked a significant simplification of the trader’s task, transforming those formulas into advisory programs that furnish clear visual signals for initiating trades. Despite the vast array of market analysis tools available, certain instruments have stood the test of time and been employed by financiers for decades.
Among these enduring tools is the Stochastic indicator. It is noteworthy that the widespread popularity of this instrument is well-earned, as not every oscillator can boast such versatility.
More About the Stochastic Oscillator
As previously mentioned, the Stochastic functions as an oscillator, so it consists of levels and a signal line. While this holds true in general, the Stochastic oscillator stands out by incorporating two MA (moving averages), setting it apart from other technical tools.
Let’s delve into the levels. In its standard configuration, the advisor encompasses levels such as 0, 20, 50, 80, and 100. It’s worth noting that the 50 marks may not be present in every trading platform. For instance, in Olymp Trade, it is notably absent because its significance in trading is relatively minimal.
The more intriguing components are the two moving averages, specifically the fast and slow signal lines, which constitute the bulk of the generated signals.
The essential parameters of the oscillator encompass the periods of the moving averages, the deceleration factor, and, essentially, the levels that can be added or removed from the working area in certain terminals.
Critical periods for effective trading are those of the signal lines. For lower timeframes, it is advisable to employ values of 5 for the fast line and 3 for the slow line. Meanwhile, for longer timeframes, optimal periods are 14 for the fast line and 5 for the slow line.
The introduction of a slowdown factor in this indicator serves the purpose of preventing it from reacting to market noise and producing false signals. Typically, this parameter is set to 3 for all time periods.
Other than that, no additional adjustments are needed. Once you’ve selected the timeframe and configured the relevant parameters, you are ready to commence trading with confidence.
Learn how to read the Stochastic signals
The tool generates a considerable number of signals, and a trader must know how to read them. First, the primary and most dependable signal is the emergence of signal lines from the “over” zones.
In situations of oversold conditions, a CALL option (upside) is recommended for purchase.
Conversely, in situation of overbought conditions, a PUT option (downside) is favored.
Pay attention on the slow line. Another good signal involves the crossover of signal lines.
Initiate a CALL option when the fast line crosses above the slow line. Conversely, procure a PUT option when the crossover transpires in the downward direction.
Let us remind you that the Stochastic is an oscillator, that is why the divergence remains relevant.
Lastly, the least reliable signal involves crossing the 50 level either up or down. A contract is executed in the corresponding direction, but it is advisable to incorporate an additional confirmation tool in such cases.
In conclusion, the Stochastic Oscillator proves to be a powerful tool for flexible market analysis, offering a range of signals for traders to consider. From reliable crossovers and divergence patterns to the cautious interpretation of level crossings, this oscillator provides a versatile foundation for crafting effective trading strategies. Despite its varied signals, it’s crucial to exercise prudence and consider additional confirmation tools for certain scenarios. With its enduring popularity and applicability across diverse financial exchanges, the Stochastic Oscillator remains a valuable resource for traders navigating the complexities of the market.