Forex for a trader
Forex stochastic formula

Forex stochastic formulaForex Stochastic Oscillator Formula for Day Trading. Any trading platform offers multiple indicators for analyzing a market. Either trend ones or oscillators, they help traders finding places to buy or sell. The Forex Stochastic oscillator is an accurate indicator for both scalping and swing trading. Moreover, the stochastic oscillator formula is simple and easy to use. Trading is a game of probabilities. As long as traders understand there’s no magic formula that works one hundred percent of the times, profits will come. The idea is to find a proper way to make money with the winning trades. Of course, the bigger the winning rate, the better. Risk management or money management plays an important role. Most of the times, traders face difficult decisions.

In theory, it sounds very simple. Every trader knows heshe needs to cut losses asap. Or to let profits run. Everyone agrees with that. Yet, this is a difficult thing to put into practice. The stochastic oscillator comes to help with this decision. As often is the case, retail traders end up losing money despite correctly reading the market. Greed and fear are the worse enemies. You may know where the market goes, but this doesn’t mean you’ll make a profit. Discipline and patience matter the most, while an indicator like the Forex stochastic one comes to help. Its biggest advantage is visibility. Traders see any signals generated and have plenty of time to react. This is especially true if the time frame is big enough.

Another plus comes from its characteristics. It is essentially following the market. The currency pair makes a new high? Chances are, the stochastic oscillator Forex indicator does the same. If not, trading strategies derive from it. What is Stochastic Oscillator? First of all, being an oscillator, it appears at the bottom of a chart. Any oscillator appears in a separate window at the bottom of a chart. This tells much about its usability: to spot fake moves the price may make. Second, it has two lines: the main and the signal line. They go hand in hand on that small window below the chart, and all eyes should be on these two lines. The signal one (the MetaTrader shows it with the red color) is a fast moving average, while the main one is a bit slower. The default settings show the 5 and 3 periods for the two lines, with the fastest one having the smaller number. While the default scenario uses a simple moving average, any type works: exponential, smoothed, etc. All options work just fine. George Lane, the guy who developed the stochastic indicator Forex traders use, was a smart guy. He wanted to have an indicator that measures the difference between the actual price and the price range over a period of time. And this is exactly what the stochastic oscillator calculation shows.

One thing is important here. The default settings are just default settings. By no means, one cannot change them. However, before doing that, keep in mind the two lines will flatten. This will make trading signals difficult, if not impossible to spot. Not to mention, irrelevant. For this reason, it’s best to use it with the default settings. If you apply it on a regular chart, it will look exactly like the image below. The usual caveat applies here too: the bigger the time frame, the bigger the implications. Stochastic Oscillator Formula. Before discussing the actual formula, we should look at what it means. The indicator travels only in positive territory: between the zero and one hundred levels. You’ll never see values bigger than one hundred or smaller than zero. This just comes from how the stochastic oscillator parameters work.

As mentioned above, its formula considers the main and the signal lines. The main line is %K and the signal %D. The actual formula is irrelevant. What matters the most for Forex traders is to know how to read the stochastic oscillator, not the mathematical formula. For math fans, though, this is how the mainline formula looks like: %K = 100(C – L5close)(H5 – L5) where C = the most recent closing price L5 = the low of the five previous trading sessions H5 = the highest price traded during the same 5 day period. The %D line is much simpler: %D = 100 X (H3L3). Now you know why the oscillator comes with the 5 and 3 values as the default ones: the five and the three day-periods make up the formula. As a rule of thumb, an oscillator’s purpose is to detect a lie. Or a fake move that price might make. Between the price and an oscillator, traders should always trust the oscillator. How come? The answer is straightforward: there are more periods considered, whereas the price shows the current market stance. If one of the two is making a fake move, the price is the one. Hence, the Forex stochastic oscillator settings for day trading work best when traders use them against the current price. Stochastic Oscillator Settings for Scalping. Traders open and close a position based on various things. The most important one is time. To be more exact, the time horizon of a trade gives the type of the trading style used.

Therefore, swing traders consider a few hours or even days for a trade. Investors don’t worry about time that much. What they do is they focus on the macro-picture. For investors, it matters most to be fundamentally right, then quick profits. And then there are scalpers. This is where the average Joe, the Forex retail trader fits into. Retail traders start with a huge disadvantage: their own expectations related to trading. Most of them come to Forex trading for a quick and fast buck. The quicker, the better. The less effort, even better. Trading doesn’t work this way. Or, it may, but is not profitable this way on the long run. Yet, the stochastic oscillator formula is the same for all investors. The only difference comes from the time frame used. Here’s a quick guide for correlating a Forex stochastic strategy with the right time frame, having the time for a trade in mind: – investors use it on the weekly and monthly charts, focusing on the last one – swing traders come down to the daily, four-hour and hourly charts – scalpers typically use the five-minute and lower time frames. The strategies with the Forex stochastic oscillator to be explained here follow George Lane’s intention.

That is, to create an indicator based on a simple formula that helps to spot fake moves. The beauty of this indicator is that all traders can use it. Are you in for a quick buck and scalping suits your personality? Use the stochastic indicator! Is swing trading your thing? How about trying this indicator? Even investors find tremendous value in it. How to Use the Forex Stochastic Oscillator? George Lane wanted multiple things from this oscillator. And, in a way, he did a great job. Any oscillator, in the end, shows overbought and oversold levels. Hence, the first thing to look for is to buy oversold and sell overbought levels. But, an oscillator is more than that.

The focus should always stay on it. When dealing with an oscillator, some traders won’t even look at the actual price. They simply trade the oscillator’s moves more than the ones the price does. Because the idea is to find out fake moves for the actual price, traders look for divergences. To be more exact, divergences between the price and the oscillator. Hence, a great stochastic oscillator strategy is to trade these divergences. Moreover, if the absolute range is between zero and one hundred, can we do something about it? Is there any stochastic oscillator trading strategy derived from this? The rest of this article deals with three ways that show how to use stochastic oscillator. For this, we’re using the default settings, just like George Lane intended. All of them have one thing in common: they consider the cross between the signal and the main line. As always, keep in mind the time frame.

The bigger it is, the bigger the implications for every strategy described below. Trading Overextended Levels. In Forex trading, overextended refers to overbought or oversold levels. Therefore, the standard interpretation of an indicator that shows such levels is the following: buy oversold and sell overbought. The chart below shows the EURUSD hourly time frame. Moreover, this stochastic oscillator trading strategy uses the current prices. This is important as one can test the relevance of it. The stochastic oscillator indicator shows overbought and oversold levels above or below 80, respectively 20. However, keep in mind what was mentioned earlier: the cross between the two lines matter. As such, using the Forex stochastic oscillator this way assumes traders should look for a cross in an overbought or oversold territory. More exactly, above 80 or below 20. Since these are the levels, they give the entries. The idea is to sell on a cross above 80 and stay short until the fast line reaches the 20 level. And then, reverse.

Go long on a cross below 20 and stay that way for the fast line to reach the 80 area. This approach of how to read the stochastic oscillator worked like a charm. At least, the EURUSD hourly chart above shows great entries. However, there’s a catch: it works when the market is in a range. The problem comes from the way the market behaves. While ranges predominate, they will be broken. Eventually! And when that happens, no overbought and oversold level can help your trading account. In trading, there’s a saying: the market can stay in overboughtoversold areas more than a trader stays solvent. That is so true! As a consequence, there must be some other ways of using stochastic oscillator when the market breaks a range.

A stochastic oscillator divergence will show the right direction. Moreover, if used with proper riskreward ratios and a disciplined approach, trading is fun. How to Use Stochastic Oscillator Divergences. A divergence forms when the price does something different than the oscillator. Or, the other way around. In both cases, one is lying, and that one is the price. Hence, traders should focus on the oscillator, rather than the price. Divergences are of two types: bullish and bearish ones. The rule calls for long trades after a bullish divergence and short trades to follow a bearish one. Needless to say, bullish divergences appear at the end of bearish trends, and bearish divergences at the end or bullish ones. Therefore, trading them is risky! Have you ever heard of “catching a falling knife” in trading? If yes, it was invented when traders bought bullish divergences. However, traders are of two types: conservative and aggressive ones. Aggressive traders will always look to buy the absolute low. That is possible but very difficult. How about waiting for a confirmation?

Divergences show how to use stochastic oscillator in Forex trading when a decision needs to be made. Have a look at the chart below in order to understand what a divergence is and how the market confirms it. Unfortunately, not everyone waits for a confirmation. That is when trading becomes expensive. Aggressive traders will argue here that better riskreward ratios derive from being earlier in a trade. As a side note, the reward should be always bigger than the risk. Two, three or even higher multiples are part of a successful trader’s toolkit. In any case, divergences give an educated guess regarding the future price direction. If anything, they show the trend hesitation. The oscillator’s ability to diverge from price tells much about the undergoing momentum or the current move’s lack of strength. As a tip, when looking for divergences, try to find two higherhighs or lowerlows that the oscillator doesn’t confirm. Crossing the Middle Range.

The example above shows what conservative traders should look at before entering a trade. The bearish divergence gets confirmed by price moving below the lowest value of the previous swing. That is when selling should take place. After all, when dealing with your own money, you want to take all the precautionary measures possible. Besides the two strategies from above, there’s another way that shows how to use stochastic oscillator in Forex. The key to this is to use a trick given by the stochastic oscillator formula. How about splitting the range? The entire range matters here, not the one between overbought and oversold areas. Having said that, the middle point between one hundred and zero is fifty. We can edit the indicator by right-clicking on the chart area, select it from the Indicators List and choosing the Levels tab. Simply add the 50 value, select the color and style, and it will appear on the oscillator’s window. The idea behind this strategy is simple: use the 50 level as a continuation pattern. It means we should buy when the level gets crossed from below and sell when the oscillator comes from above. Such a simplistic approach fails more than succeeds.

But this doesn’t make it unprofitable. Whit risk-reward ratios bigger than 1:2 or 1:2.5 the account grows nicely. The targets for this Forex stochastic oscillator strategy differ with the time frame. On a five-minute chart, smaller targets come with bigger volume. The opposite is true on bigger time frames: volumes drops on behalf of a bigger target. Not once, traders fall prey to false expectations. Everyone looks for the holy grail in trading: find a strategy that works all the time. Instead, people should focus on a strategy that works MOST of the times. That makes money! Video Example of the Stochastic Oscillator. And now you have the wonderful opportunity to see the Stochastic Oscillator in action for free. Below you will find a video that shows one of my trades with the Stochastic. I managed to match an overbought Stochastic signal with a price bounce from a bearish trend line. Therefore, I shorted the GBPUSD on the assumption that the price is about to decrease.

Meanwhile, a Double Top chart pattern was confirmed on the chart, which gave additional support for my short trading decision. See the video for free by entering your details! This article used the standard stochastic oscillator settings to show ways to trade with it. However, the best stochastic settings for day trading are the ones that consider risk management. In trading, this is more important than any trade setup. If you don’t understand the risk, you don’t know the reward. Both of them matter in the end. This is the idea of any oscillator, no matter its name. Even though overbought or oversold levels aren’t specified, it is easy to build them. Likewise, divergences show the right direction when used with any oscillator. If that is the case, what is stochastic oscillator showing differently than other indicators? What makes it so special? Firstly, it shows a cross. This cross acts as a signal. One cannot say the trade was missed if the cross is in place.

Secondly, when the cross forms above the 80 level, you simply don’t want to be long. Or short, if a bullish cross is below the 20 level. When this happens on the five-minute chart, missing it is not a problem. However, on the daily and above, this is a costly mistake. In Forex trading, mistakes translate in losing money. We all want to avoid that. Last but not least, the Forex stochastic oscillator formula allows for multiple ways to trade it. Either selling a bearish divergence or buying a bullish one, a proper money management system and discipline result in the account growing in time. A trader has the best results when trading follows the rules. Rules, on the other hand, make a trading system and this, in turn, may, or may not be profitable. The profitability degree depends on the indicators used, and the stochastic oscillator explained here is among the best of them.

GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. How to Calculate the Stochastic Oscillator. Discover how to calculate the stochastic oscillator in Excel, and get a web-connected spreadsheet that automatically plots this critical technical indicator. The link to the free automated spreadsheet with connectivity to Yahoo Finance is at the bottom of this article, but read on to discover more about the stochastic oscillator.

George C. Lane, in an intellectual epiphany, developed the stochastic oscillator in the late 50s. This important technical indicator calculates the momentum of stock price changes, and is defined by these equations (courtesy of Wikipedia). C is the current closing price H is the highest high over the lookback period L is the lowest low over the lookback period. %K is plotted with another quantity, %D. %D is a simple moving average of %K over a defined smoothing period. The lookback period is usually 14 days and the smoothing period is usually 3 days . %K and %D always range between 0 and 100. Three variants are commonly employed by technical traders. The fast stochastic is described by the equations above The slow stochastic: %K is a three-period moving average of the fast %K, with %D being an n-period moving average of the fast %K The full stochastic: %K is an n-period moving average of the fast %K, with %D being an n-period moving average of the the full %K. If a security trends upwards day-by-day, then it generally closes near the upper limit of its daily trading range; the stochastic oscillator will rise. However, if the security falls, then then daily closes will be at or near the lower limit of their daily trading range; the stochastic oscillator will then fall. If the stochastic oscillator. rises above 80, signs point to an overbought stock; prices could well fall in the near future falls below 20, signs point to an oversold stock; prices could very well bounce upwards. rises above %D, that’s a buying signal (unless the values are greater than 80) falls lower than %D, that’s a selling signal rises above 90 or 95 and then falls, you’ll probably want to sell before %K falls below 80. A divergence happens when the stochastic oscillator (typically the %D line) and the stock price move in opposite directions; this means the general trend is losing its strength, and could very well reverse. if the stock price trends downwards and makes lower lows, but the stochastic oscillator does not fall further than its prior lows, that’s a bullish divergence if the stock price trends upwards and makes higher highs, but the stochastic oscillator does not rise further than its prior highs, that’s a bearish divergence. The divergence signals are amplified if %D is above 80 or below 20. The stochastic oscillator is often paired with MACD; these two technical indicators work well together. The stochastic oscillator is easy to calculate in Excel. You can use worksheet formulas (this is simpler but less flexible) or VBA (this requires more specialist knowledge but it far more flexible).

This is how you calculate the stochastic oscillator using worksheet formulas. Step 1 . Get OHLC data for your stock. You could use the ever-popular Bulk Stock Quote Downloader (if you do, remember to copy the downloaded data into a new spreadsheet – otherwise your formulas get deleted when you updated the sheet). Your data may look like this. Step 2 . Assuming that the lookback period for %K is 14 and the smoothing period for %D is 3, enter the worksheet formulas as illustrated below. Step 3 . You can now plot %K, %D and the close price using Excel’s charting tools. Plot the Stochastic Oscillator Automatically For Any Stock or Index! This Excel spreadsheet automates the calculation of this technical indicator for any ticker found on Yahoo Finance. After you. enter two dates. a ticker symbol, your lookback and smoothing period and click a button, some clever VBA connects to Yahoo, downloads historical OHLC data, and performs the calculations.

The chart in the picture plots this technical indicator for the S&P500 (^GSPC). %K and %D bounce between 10 and 90, moving with the stock price; This generates relatively reliable trading signals. Get the spreadsheet at the link below. 6 thoughts on “ How to Calculate the Stochastic Oscillator ” Hi Sir, I have tried to plot stochastic oscilator by copying into my own excel, everything is working but close price line is missing as well not updating on the right side. please tell me how can i overcome this problem. the formula on this page is not correct. (%K=(C–H)(H–L) ?100) It must be %K=(C–L)(H–L) ?100 -> (C-L) instead of (C-H) In the spreadsheet the correct formula is used. Thank you – I’ll correct the formula in the article. Samir: I’m getting VBA error on querying data 43. I’m trying to use Apache OpenOffice on my ASUS notebook PC. o perhaps the problem is OpenOffice but I do have macros enabled. Your Excel program looks very useful, so I hope I can use it on OpenOffice.

Thanks. I’m not sure if it will work in OpenOffice (don’t know if that understands VBA). I’ve only ever used the spreadsheet on Excel 2010 or 2013 on Windows. Shouldn’t equation 2 in your spreadsheet be =MIN(D2:D15) instead of =MIN(C2:C15)? Forex stochastic formula. Trading with Stochastic indicator involves the following signals: Stochastic lines cross — indicates trend change. Stochastic readings above 80 level — currency pair is overbought, Stochastic staying above 80 level — uptrend is running strong. Stochastic exiting 80 level downwards — expect a correction down or beginning of a downtrend. Same for readings below 20 level — currency pair is oversold, staying below 20 — doentrend is running strong, exiting upwards above 20 — expect an upward correction or a beginning of an uptrend. The idea behind Stochastic indicator. The main idea behind Stochastic indicator according to its developer, George Lane, lies in the fact that rising price tends to close near its previous highs, and falling price tends to close near its previous lows. How to interpret Stochastic indicator. Stochastic is a momentum oscillator, which consists of two lines: %K - fast line, and %D - slow line. Stochastic is plotted on the scale between 1 and 100. There are also so called "trigger levels" that are added to the Stochastic chart at 20 and 80 levels. Those lines suggest when the market is oversold or overbought once Stochastic lines pass over them.

How to trade with Stochastic indicator. Let’s look at three methods of trading with Stochastic indicator. Method 1. Trading Stochastic lines crossover. This is the simplest and common method of reading signals from Stochastic lines as they cross each other. Stochastic %K and %D line work similar to moving averages and: when %K line from above crosses %D line downwards traders open Sell orders. when %K line from below crosses %D line upwards traders open Buy orders. Stochastic lines crossovers that happen above 80% level and below 20% level are treated as strongest signals, compare to crossovers outside those levels. Traders may choose sensitivity of their Stochastics. The smaller the Stochastic parameters, the faster it will react to market changes, the more crossovers will be shown. Sensitive Stochastic (for example 5, 3, 3) is useful for observing rapidly changing market trends. But because it is too choppy it should be traded in combination with other indicators to filter out Stochastic signals.

Method 2. Trading Stochastic oversoldoverbought zones. Stochastic by default has 80% level, above which market is treated as overbought, and 20% level, below which market is considered oversold. It is important to remember that while in sideways moving market a single Stochastic lines crossover that occur above 80% or below 20% will most of the time result in a fast predictable trend change, in trending market could mean just nothing. When price is trending well, Stochastic lines may easily remain in overboughtoversold zone for a long period of time while crossing there multiple times. That’s why a method of trading overboughtoversold zones stands up. The rules here are to wait until Stochastic lines after being in overboughtoversold zone come out from it. E. g. When stochastic was trading for some time in overbought zone – above 80% level, traders wait for the lines to slide down and eventually cross 80% level downwards before considering to take Short positions. Opposite for Long positions: wait till Stochastic lines come into the oversold zone (below 20% level); wait further until Stochastic lines eventually cross 20% level upwards; initiate a buy order once Stochastic lines are firmly set, e. g. a trading bar is closed and Stochastic lines cross over 20% mark is fixed. Method 3. Trading Stochastic divergence. Traders are looking for a divergence between Stochastic and the price itself. At times when the price is making new lows while Stochastic produces higher lows creates dissonance in the picture. It is called divergence. Divergence between price and Stochastic readings suggest a forming weakness of a main trend and therefore its possible correction.

Full versus Fast versus Slow stochastic. Full Stochastic inidcator has 3 parameters, like: Full Stoch (14, 3, 3), where the first and the last parameters are identical to those found in Fast and Slow Stochastic: the first parameter is used to calculate %K line, while the last parameter represents the number of periods to define %D - signaling line. The difference between Full and other Stochastics lies in the second parameter, which is made to add smoothing qualities for %K line. Applying this smoothing factor allows Full Stochastic be a bit more flexible for chart analysis. Stochastic Oscillator. The Stochastic Oscillator Technical Indicator compares where a security’s price closed relative to its price range over a given time period. The Stochastic Oscillator is displayed as two lines. The main line is called %K. The second line, called %D, is a Moving Average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line. There are several ways to interpret a Stochastic Oscillator. Three popular methods include: Buy when the Oscillator (either %K or %D) falls below a specific level (for example, 20) and then rises above that level. Sell when the Oscillator rises above a specific level (for example, 80) and then falls below that level. Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

Look for divergences. For instance: where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs. You can test the trade signals of this indicator by creating an Expert Advisor in MQL5 Wizard. Four variables are used for the calculation of the Stochastic Oscillator: %K periods. This is the number of time periods used in the stochastic calculation. %K Slowing Periods. This value controls the internal smoothing of %K. A value of 1 is considered a fast stochastic; a value of 3 is considered a slow stochastic. %D periods. This is the number of time periods used when calculating a moving average of %K. %D method.

The method (i. e., Exponential, Simple, Smoothed, or Weighted) that is used to calculate %D. The formula for %K is: %K = (CLOSE - MIN (LOW (%K))) (MAX (HIGH (%K)) - MIN (LOW (%K))) * 100. CLOSE — today’s closing price; MIN (LOW (%K)) — the lowest minimum in %K periods; MAX (HIGH (%K)) — the highest maximum in %K periods. The %D moving average is calculated according to the formula: Stochastic Oscillator - indicator for MetaTrader 4. The Stochastic Oscillator Technical Indicator compares where a security’s price closed relative to its price range over a given time period. The Stochastic Oscillator is displayed as two lines. The main line is called %K. The second line, called %D, is a Moving Average of %K. The %K line is usually displayed as a solid line and the %D line is usually displayed as a dotted line. There are several ways to interpret a Stochastic Oscillator. Three popular methods include: Buy when the Oscillator (either %K or %D) falls below a specific level (e. g., 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e. g., 80) and then falls below that level; Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line; Look for divergences. For instance: where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs. Calculation. The Stochastic Oscillator has three variables: %K periods (Pk). This is the number of time periods used in %K calculation. By default is 5; %K Slowing Periods (Sk). This value controls the internal smoothing of %K. A value of 1 is considered a fast stochastic; a value of 3 is considered a slow stochastic. By default is 3; %D periods (Pd). This is the number of time periods used when calculating a moving average of %K. By default is 3; The formula for %K is: %K = 100*SUM (CLOSE - MIN (LOW, Pk), Sk) SUM (MAX (HIGH, Pk) - MIN (LOW, Pk)), Sk) CLOSE — is today’s closing price; MIN (LOW, Pk) — is the lowest low in Pk periods; MAX (HIGH, Pk) — is the highest high in Pk periods; SUM (CLOSE - MIN (LOW, Pk), Sk) — amount composed CLOSE - MIN (LOW, Pk) for period Sk; SUM (MAX (HIGH, Pk) - MIN (LOW, Pk)), Sk) — amount composed HIGH (Pk)) - MIN (LOW, Pk) for period Sk. The %D moving average is calculated according to the formula: Pd — is the smoothing period for %K; SMA — is the Simple Moving Average.

Technical Indicator Description. Full description of Stochastic is available in the Technical analysis: Stochastic Oscillator. Stochastics Indicator Explained – What are Stochastics? The “Stochastics” indicator is a popular member of the “Oscillator” family of technical indicators. George Lane created the Stochastics oscillator when he observed that, as markets reach a peak, the closing prices tend to approach the daily highs, and vice-versa. The Stochastics indicator is said to be “leading” since it generates signals before they appear in pricing behavior. Traders use the indicator to determine overbought and oversold conditions and the beginnings and endings of cycles in the forex market. The Stochastics indicator is classified as an “oscillator” since the values fluctuate between zero and “100”. The indicator chart typically has lines drawn at both the “20” and “80” values as warning signals. Values exceeding “80” are interpreted as a strong overbought condition, or “selling” signal, and if the curve dips below “20”, a strong oversold condition, or “buying” signal, is generated. Stochastics Formula. The Stochastics indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps: Stochastics consist of two lines formed by “%K” and “%D”; Choose a period “N” for “%K”, “X” for %D (Standard settings = 9,3); %K = 100 * (CCL – LN)(HN – LN) where CCL = Current Closing Price, LN = lowest low of past “N” periods, HN = highest high of past “N” periods; %D = 100 * (HX LX) where HX = X-period sum of (CCL – LN), LX = X-period sum of (HN – LN). Software programs perform the necessary computational work and produce a Stochastics indicator as displayed by the two lines in the bottom portion of the following chart: The Stochastics indicator is composed of two fluctuating curves – the “Green” %K line, and the “Red” %D signal line. Forex traders prefer a slower version of this indicator because they believe the signals are more accurate.

For Slow Stochastics, %K becomes the old %D line, and the new %D is derived from the new %K. The chart above is the slower version, a setting selection on the Metatrader platform. The Stochastics oscillator is viewed as a “leading” indicator, in that its signals foretell that a change in trend is imminent, especially when lines cross into extreme regions. The weakness in the indicator is that it is difficult to discern how long in advance the signal truly is. How to Read a Stochastics Chart. The Slow Stochastics oscillator with settings of “9, 3, 3” is presented on the bottom portion of the above “15 Minute” chart for the “AUDUSD” currency pair. In the example above, the “Green” line is the Stochastics “%K” value, while the “Red” line represents the “%D” signal line that acts like a moving average. Stochastics values below 20 and over 80 are worthy of attention. The Stochastics Rollercoaster. The key points of reference are highpoints, lowpoints, divergences, and occasionally crossovers. The slow “Stochastics Rollercoaster” tends to be more sensitive and is favored by forex traders. The Stochastics oscillator attempts to convey pricing momentum direction changes. Typical “oversold” and “overbought” conditions are noted on the chart, and line crossings confirm these trading signals. Divergences are also important as seen in the noted “overbought” condition. Prices are reaching new highs, but the Stochastics are already receding from previous highs, a sign to sell or short. As with any technical indicator, a Stochastics chart will never be 100% correct.

False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Stochastics signals must be developed over time, and complementing the Stochastics tool with another indicator is always recommended for further confirmation of potential trend changes. In the next article on the Stochastics indicator, we will put all of this information together to illustrate a simple trading system using this Stochastics oscillator. Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you. Stochastic Oscillator. What is a 'Stochastic Oscillator' The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. Derivative Oscillator. BREAKING DOWN 'Stochastic Oscillator' The stochastic oscillator is calculated using the following formula: %K = 100(C - L14)(H14 - L14) C = the most recent closing price.

L14 = the low of the 14 previous trading sessions. H14 = the highest price traded during the same 14-day period. %K= the current market rate for the currency pair. %D = 3-period moving average of %K. The general theory serving as the foundation for this indicator is that in a market trending upward, prices will close near the high, and in a market trending downward, prices close near the low. Transaction signals are created when the %K crosses through a three-period moving average, which is called the %D. History of the Stochastic Oscillator. The stochastic oscillator was developed in the late 1950s by George Lane. As designed by Lane, the stochastic oscillator presents the location of the closing price of a stock in relation to the high and low range of the price of a stock over a period of time, typically a 14-day period. Lane, over the course of numerous interviews, has said that the stochastic oscillator does not follow price or volume or anything similar. He indicates that the oscillator follows the speed or momentum of price. Lane also reveals in interviews that, as a rule, the momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences. This signal is the first, and arguably the most important, trading signal Lane identified. Overbought vs. Oversold. Lane also expressed the important role the stochastic oscillator can play in identifying overbought and oversold levels, because it is range bound. This range – from 0 to 100 – will remain constant, no matter how quickly or slowly a security advances or declines.

Considering the most traditional settings for the oscillator, 20 is typically considered the oversold threshold and 80 is considered the overbought threshold. However, the levels are adjustable to fit security characteristics and analytical needs. Readings above 80 indicate a security is trading near the top of its high-low range; readings below 20 indicate the security is trading near the bottom of its high-low range. What is the 'StochRSI' The StochRSI is an indicator used in technical analysis that ranges between zero and one and is created by applying the Stochastic Oscillator formula to a set of Relative Strength Index (RSI) values rather than standard price data. Using RSI values within the Stochastic formula gives traders an idea of whether the current RSI value is overbought or oversold - a measure that becomes specifically useful when the RSI value is confined between its signal levels of 20 and 80. Money Flow Index - MFI. BREAKING DOWN 'StochRSI' The StochRSI was developed by Tushar Chande and Stanley Kroll and detailed in the book The New Technical Trader published in 1994. While technical indicators already existed to show overbought and oversold levels, the two developed StochRSI to improve sensitivity and generate a greater number of signals than traditional indicators. The StochRSI is calculated using the following formula: StochRSI = (RSI - Lowest Low RSI) (Highest High RSI - Lowest Low RSI) The StochRSI is a second derivative of price, which means that it doesn't always look similar to the price. The indicator deemed to be oversold when the value drops below 0.20, meaning the RSI value is trading at the lower end of its predefined range, and that the short-term direction of the underlying security may be nearing a correction. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme levels and could be used to signal a pullback in the underlying security. In addition, the StochRSI can be used to identify short-term trends by looking at it in the context of an oscillator with a centerline at 0.50. When the StochRSI is above 0.50, the security may be seen as trending higher and vice versa when it's below 0.50. The downside to using the StochRSI for these reasons is that it tends to be quite volatile, which means that some smoothing may be needed.

Some traders will take a moving average of the StochRSI to reduce the volatility and make the indicator more useful. For example, a 10-day simple moving average of the StochRSI can produce an indicator that's much smoother and more stable. Of course, the StochRSI should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness, especially given the high number of signals that it generates. Non-momentum oscillators, such as the Accumulation Distribution Line, may be particularly helpful because they don't overlap in terms of functionality and provide additional insights. February 9, 2016 Posted by: Roman Sadowski Category: Forex Blog. There is much misunderstanding of technical indicators out there. Traders tend to use many indicators without researching or knowing what they are and how are they calculated. Even less traders ever bother to test accuracy of indicators they use. You would be very surprise to find out that many of them have less than 30% accuracy but you still use them! This article will cover most important things every forex trader should know about Stochastic Oscillator. Points to cover: 1. You can use stochastics oscillator to measure the speed and momentum of a price over a time period. 2. A low value point to the strong uptrend as much as it points to a strong downtrend. 3. A high value points to the strong downtrend as much as it points to a strong uptrend. 4. Stochastic oscillator works best when used with leading indicators , chart patterns, and volume and price movement. 5. The trend following strategy can be a profitable one to use with stochastic 6. Stochastics oscillator must be paired with multi-frame analysis. Definintion: A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time.

It is one of the earliest technical oscillators in securities trading used to predict future market direction. ‘Stochastic’ is Greek for ‘random’, and in the context of trading, refers to using past actions to forecast a future state. ‘Oscillator’ refers to repetitive variations up or down the equilibrium position. Formula Stochastics oscillator is measured using the %K and %D lines. %K = 100 (C – L14) (H14 – L14) C is the current closing price L14 is the lowest price when looking back at the 14 previous trading sessions H14 is the highest price when looking back at the 14 previous trading sessions %K tracks the most recent market rate for the currency pair. %D = 3 – period simple moving average of %K. It is also called the ‘stochastic slow’ due it slower reactions to market price changes compared to %K. Stochastic Oscillator is an index compiled with recent low and high of the price and put the current price in the context in % terms. Characteristics. #1. Stochastic oscillator is a lagging indicator. 90% of all indicators are lagging indicators , including stochastics. It is important to grasp this concept right from the beginning.

Once you understand, you will position yourself way ahead of other traders out there. It is important to note that. stochastics oscillator is price-driven as opposed to driving the price. All indicators built into a trading platform are being computed based on price data fed into that platform. If price isn’t recorded in the trading software, the indicators cannot be populated. There are four dimensions of the price – Open, Close, High, Low All indicators are a different versions of the same data source. Equation and time sets might change but the core of all of the is the same. To easily verify this, you can go to Meta Editor in Meta Trader4 And open the core files of any lagging indicator you wish. After inspecting the code, you will realize they are all using difference equations but the same core data. None of lagging indicators you are currently using are capable of predicting future price. They simple cannot! Price is influenced by external factors, not the indicators. Having said that, making correct judgments even some of the time can be very rewarding and Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy. There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. #2. OverboughtOversold levels often indicate a strong trend, not a reversal.

First off, there is a wrong belief that stochastic can point to overbought or oversold levels . A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal. There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below 20. To simply test any indicator in real time you can use the visual mode “Strategy tester” within your MetaTrader4 platform. Follow instructions below #1 #2 Select any of the indicators, select symbol, select timeframe, select visual mode and time period, Click start You will now see the price action unfolding on the screen together with the indicator of your choice. It doesn’t take long to see that Stochastic Oscillator does what we expect it to do only half the time! Trader can’t blindly follow overbought or oversold rule. As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly. Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal. When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis. Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks. Buying would not be a great idea! #3. Stochastic Oscillator must be used in conjunction with other leading indicators. Traders use indicators for technical analysis in order to gain useful additional information. Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy.

Look at it this way: by using a single indicator in isolation, you’re basing your entire strategy on just that and nothing else. To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements. Stochastic MUST an add-on to a much larger, sound trading strategy. This is its role! Take a look at the setup below. Larger trading strategy in this example is a sound price action technique. Trader waits for the price to make higher high at B (after A) He measures the retracement by Fib. The price pulled back to 38% @ point C. The long market entry can be placed here. Stochastic oscillator in this case serves as an additional confirmation of the reversal and plays a part within larger trading strategy. #4. It works best with the trend following strategy.

Trend following signals are strong as they take the market’s own movement into account. A basic stochastic trend following signal is a signal line crossover , occurring when the %K line crosses the %D line in confirmation with the trend. When %K (short-term line) crosses below %D (long-term trend) and returns above it, you can consider it an uptrend and a buy signal. The reverse holds true for a downtrend. Trend following is one of the most used strategies in forex trading. Stochastic can be used to enter the market on pullbacks within the trend. Pullbacks are short-term movements that go contrary to the existing direction of the price trend. If the market is moving above the simple market average – that is, in a bullish environment – you can consider entering long when a pullback occurs. When the price is below the average and a downtrend is on the cards, you will need to wait for short entries on pullbacks occurring in the trend. #5. Always use Stochastic Oscillator on multi-frame. Sometimes traders get confused analysis markets on many time frames at the same time. An hourly time frames may give you bearish signals but your daily or weekly time-frames may show bullish signals. If you wait for the lower time frame to revert to the direction of the larger time-frame, the stochastic will start showing bullish signals on both charts. But this is time-consuming.

It is best to use one chart on which you will make decisions and view other timeframes to adjust your bias accordingly. The time dimension offers more confirmation on trend lines to make smarter decisions. Using multiframes initially can cause some confusion, but if you use them properly, you will be able to locate good entry points and make cleaner entries than if you were to use single frames. The above screenshot includes stochastic on a 30 minute, 4 hours and 1day chart in one window. This provides a broader reading on the market for better accuracy. Trader can line up large timeframe behavior to gain more insight. Ideal entry would be with all stochastics lined up on one side. Download multi-period-stochastic-indicator here. There is much more to trading than just a bunch of indicators on the chart. Trader must show deep understanding of the macro markets and economics first. Indicators should be used as an additional market entry tool, a confirmation rather than a strategy itself. landing_block type=”newsletter” February 9, 2016 Posted by: Roman Sadowski Category: Forex Blog. There is much misunderstanding of technical indicators out there.

Traders tend to use many indicators without researching or knowing what they are and how are they calculated. Even less traders ever bother to test accuracy of indicators they use. You would be very surprise to find out that many of them have less than 30% accuracy but you still use them! This article will cover most important things every forex trader should know about Stochastic Oscillator. Points to cover: 1. You can use stochastics oscillator to measure the speed and momentum of a price over a time period. 2. A low value point to the strong uptrend as much as it points to a strong downtrend. 3. A high value points to the strong downtrend as much as it points to a strong uptrend. 4. Stochastic oscillator works best when used with leading indicators , chart patterns, and volume and price movement. 5. The trend following strategy can be a profitable one to use with stochastic 6. Stochastics oscillator must be paired with multi-frame analysis. Definintion: A stochastic oscillator is a momentum indicator comparing the closing price of a security to its price range over a specific period of time. It is one of the earliest technical oscillators in securities trading used to predict future market direction. ‘Stochastic’ is Greek for ‘random’, and in the context of trading, refers to using past actions to forecast a future state. ‘Oscillator’ refers to repetitive variations up or down the equilibrium position. Formula Stochastics oscillator is measured using the %K and %D lines. %K = 100 (C – L14) (H14 – L14) C is the current closing price L14 is the lowest price when looking back at the 14 previous trading sessions H14 is the highest price when looking back at the 14 previous trading sessions %K tracks the most recent market rate for the currency pair.

%D = 3 – period simple moving average of %K. It is also called the ‘stochastic slow’ due it slower reactions to market price changes compared to %K. Stochastic Oscillator is an index compiled with recent low and high of the price and put the current price in the context in % terms. Characteristics. #1. Stochastic oscillator is a lagging indicator. 90% of all indicators are lagging indicators , including stochastics. It is important to grasp this concept right from the beginning. Once you understand, you will position yourself way ahead of other traders out there. It is important to note that. stochastics oscillator is price-driven as opposed to driving the price. All indicators built into a trading platform are being computed based on price data fed into that platform.

If price isn’t recorded in the trading software, the indicators cannot be populated. There are four dimensions of the price – Open, Close, High, Low All indicators are a different versions of the same data source. Equation and time sets might change but the core of all of the is the same. To easily verify this, you can go to Meta Editor in Meta Trader4 And open the core files of any lagging indicator you wish. After inspecting the code, you will realize they are all using difference equations but the same core data. None of lagging indicators you are currently using are capable of predicting future price. They simple cannot! Price is influenced by external factors, not the indicators. Having said that, making correct judgments even some of the time can be very rewarding and Lagging indicators can be used as a part of the analysis based on the assumption that many market participants use them hence they become self-fulfilling prophecy. There are few very popular lagging indicators, Stochastic Oscillator is probably the most popular among traders. #2. OverboughtOversold levels often indicate a strong trend, not a reversal. First off, there is a wrong belief that stochastic can point to overbought or oversold levels . A stochastic value of more than 80 might indicate a strong uptrend as often as a reversal. There are many case studies indicating that Stochastic Oscillator more often signals a strong uptrend above 80 or a downtrend continuation below 20. To simply test any indicator in real time you can use the visual mode “Strategy tester” within your MetaTrader4 platform.

Follow instructions below #1 #2 Select any of the indicators, select symbol, select timeframe, select visual mode and time period, Click start You will now see the price action unfolding on the screen together with the indicator of your choice. It doesn’t take long to see that Stochastic Oscillator does what we expect it to do only half the time! Trader can’t blindly follow overbought or oversold rule. As you see on the screenshot below, entering long positions every time stochastic turned below 20 would ruin your account pretty quickly. Oversold levels should be also considered of an indication of a strong trend instead of a reversal signal. When there is a lot of buying or selling, it is best to follow it and not worry about the stochastic being extreme. The price action should always prevail in your analysis. Below is an example of strong, long term downtrend in EURUSD during which stochastic remained oversold for many weeks. Buying would not be a great idea! #3. Stochastic Oscillator must be used in conjunction with other leading indicators. Traders use indicators for technical analysis in order to gain useful additional information. Some may use a single indicator to only make buy or sell decisions, but I advise against it. There is no trader on this planet that made fortune in Forex by trading single indicator strategy. Look at it this way: by using a single indicator in isolation, you’re basing your entire strategy on just that and nothing else. To get an overall view and confirm trends, reversals, momentum and volatility more accurately, you must use stochastic with other indicators, chart patterns and price movements. Stochastic MUST an add-on to a much larger, sound trading strategy.

This is its role! Take a look at the setup below. Larger trading strategy in this example is a sound price action technique. Trader waits for the price to make higher high at B (after A) He measures the retracement by Fib. The price pulled back to 38% @ point C. The long market entry can be placed here. Stochastic oscillator in this case serves as an additional confirmation of the reversal and plays a part within larger trading strategy. #4. It works best with the trend following strategy. Trend following signals are strong as they take the market’s own movement into account. A basic stochastic trend following signal is a signal line crossover , occurring when the %K line crosses the %D line in confirmation with the trend. When %K (short-term line) crosses below %D (long-term trend) and returns above it, you can consider it an uptrend and a buy signal. The reverse holds true for a downtrend. Trend following is one of the most used strategies in forex trading. Stochastic can be used to enter the market on pullbacks within the trend. Pullbacks are short-term movements that go contrary to the existing direction of the price trend. If the market is moving above the simple market average – that is, in a bullish environment – you can consider entering long when a pullback occurs. When the price is below the average and a downtrend is on the cards, you will need to wait for short entries on pullbacks occurring in the trend.

#5. Always use Stochastic Oscillator on multi-frame. Sometimes traders get confused analysis markets on many time frames at the same time. An hourly time frames may give you bearish signals but your daily or weekly time-frames may show bullish signals. If you wait for the lower time frame to revert to the direction of the larger time-frame, the stochastic will start showing bullish signals on both charts. But this is time-consuming. It is best to use one chart on which you will make decisions and view other timeframes to adjust your bias accordingly. The time dimension offers more confirmation on trend lines to make smarter decisions. Using multiframes initially can cause some confusion, but if you use them properly, you will be able to locate good entry points and make cleaner entries than if you were to use single frames. The above screenshot includes stochastic on a 30 minute, 4 hours and 1day chart in one window. This provides a broader reading on the market for better accuracy.

Trader can line up large timeframe behavior to gain more insight. Ideal entry would be with all stochastics lined up on one side. Download multi-period-stochastic-indicator here. There is much more to trading than just a bunch of indicators on the chart. Trader must show deep understanding of the macro markets and economics first. Indicators should be used as an additional market entry tool, a confirmation rather than a strategy itself. landing_block type=”newsletter”



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