WHAT IS STOCHASTIC?

Talking briefly about this indicator, it is designed to measure the level of overbought and oversold of the market. The commonly used reference values are 80 and 20, if the stochastic exceeds 80, the market is considered overbought, exceeding 20 is considered oversold.

You want to learn more about the calculation formula that can be found here.

Parameter set for an indicator is 5,3,3 respectively for% K,% D and slowing variables respectively.

HOW TO USE STOCHASTIC IN TRENDING MARKET CONDITIONS

As mentioned, in sideways market conditions, the signal that stochastic gives is relatively high, however, in trending market conditions, the signal noise is abundant.


[Signals in sideways market conditions are relatively accurate]

[Signals in trending market conditions are often inaccurate]

 We are talking about how to use stochastic in trending market conditions, so the first thing to do is determine whether the market state is treding or not. 

HOW TO DETERMINE A MARKET TREND

To determine if the market is trending or not, there are In many ways, here I would like to introduce the two most common: using moving average and price action.

Using moving averages for trend identification

In this method, to determine trend with moving average we use the SMA50. Basically, when the price moves below the SMA50, the market is in a downtrend; when the price moves above the SMA50, the market is in an uptrend; when the price continuously crossed the SMA50, the market was in a sideways phase.

 

[Use 50 SMA to determine trend]

Use price action to identify trends

Using price action to determine trend we simply observe the location of the nearest low high. This is a classic but very effective method of trend determination. Basically, when the market continuously makes higher highs - higher lows mean that buying power is dominant and the market is in an uptrend. On the contrary, when the market continuously makes lower highs - lower lows, the market is in a downtrend.


[Use top/bottom to determine trend]

Expanding, during a downtrend, if the price fails to make a lower high - a lower low, the downtrend is likely to have come to an end. On the contrary, in an uptrend if the price fails to make higher highs - higher lows, the uptrend is likely to have a reversal on time.