What is the Stochastic Oscillator?

The Stochastic Oscillator compares the closing price to the price range of a security over a given period. The Stochastic Oscillator includes two lines: the mainline is called% K; The remaining line% D is the moving average of% K. Normally, the% K line on a chart is drawn immediately and the% D line is dotted.

Stochastic Oscillator - Where to add on Meta Trader 4?

To add Stochastic Oscillator indicator on Meta Trader 4 software, click Insert -> Indicators -> Oscillators -> Stochastic Oscillator:


Stochastic Oscillator - Apply to trading

The most common ways to analyze the Stochastic Oscillator are as follows:
  • Place a buy order when the indicator (either% K or% D) falls below a certain level (eg, 20) and reverses immediately afterward, above the old level. Place a sell order when the indicator breaks through a certain level (eg, 80) and then falls below the old level again;
  • Place buy orders when% K exceeds% D and sell when% K is below% D;
  • Look for divergences. For example, when the price is forming a series of highs and the Stochastic Oscillator is unable to cross its previous highs.

Stochastic Oscillator - How to calculate?

The Stochastic Oscillator includes 4 variables:
  • % K periods: Number of periods used to calculate Stochastic indicator;
  • % K slow stage: This value measures the smoothness of the% K line. Value 1 is the Fast Stochastic; value 3 is the Slow Stochastic;
  • % D periods: Number of periods used to calculate the moving average of% K;
  • % D form: Exponential, Simple, Smoothed, or Weighted.
% K = (CLOSE-LOW (% K)) / (HIGH (% K) -LOW (% K)) * 100

Inside:
  • CLOSE - today's closing price;
  • LOW (% K) - lowest low in% K period;
  • HIGH (% K) - the highest peak in% K period.
The moving average% D is calculated by the following formula:

% D = SMA (% K, N)

Inside:
  • N - phase smoothing;
  • SMA - Simple Moving Average.
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