Stochastic oscillator strategy

Stochastic oscillator strategy

There are two components to the stochastic oscillator: the %K and the bullish stochastic crossover into a trend-confirmation strategy, The Stochastics oscillator was invented in the '50s by George Lane and will be counted today among the most popular and widely used indicators of Forex traders. He compares the closing price of an underlying instrument, in our case of a currency pair with its price range over a given period.

% C = closing price low (the last n days) / High (the last n days) low (the last n days)
% D = n-periodic moving average of% K

Stochastic Oscillator Strategy — a rather safe pull-back Forex strategy based on the Stochastic Oscillator indicator. The formula may sound complicated but it's very easy to understand. As you see, the Stochastics oscillator consists of two components. A so-called% K and its moving average line, whose period can be set and which is by default at 3. The latter is also known as D%. Both values ​​fluctuate between 0 and 100% of the value of K is by default 14, but can also be changed.



The stochastic oscillator's main purpose is to measure the degree by which that is to be applied, consideration of the trading strategy should be made. If the current closing price for the depth of the last n periods represents the value of% K is at 0 If the value is the highest price in recent times is, is 100% K

It is important to understand that all information provided in the indicator, derived only from the development of the price. If the price rises, so does the value of the stochastics oscillator. If the price drops of the indicator.

How does a forex trader using the Stochastics Oscillator now?
However, these pitfalls can easily be avoided with a slightly altered strategy. One buys when stochastic oscillator falls below 20. Basically, there are again many trading strategies, but the best known are crossover and by certain indicator values ​​induced to buy or sell signals.

Crossovers are points where two lines intersect. For this indicator, this is the case when the% K line crosses the% D line. A buy signal occurs when the% D line is cut from below, a sell signal occurs when the% D line is cut from above. As you can see on the chart, this may well lead to useful signals. The red arrows labeled with the selected crossovers have each brought great profit opportunities. However one looks at the same time that it comes very often to these overlaps, and that it is somehow necessary to filter out bad trades.

This could help the second use of the oscillator. At one level, the indicator below the market value of 20 is considered oversold overbought, while a value as above 80. However, it is inadvisable to sell immediately when the Indicator affect the level of 80. George Lane recommended waiting until the price even a little, and the indicator has fallen back below 80, is to be sold. This is what I've marked on the chart with the third red arrow. If we had sold once the price has jumped more than 80, we would have lost money and would have been stopped out if we had not used a very wide stop loss. Had we waited, as recommended by George Lane, until the indicator was below 80 again, we could take the next downturn.

All in all, the Stochastics oscillator is a very useful indicator to identify overbought and oversold zones and to recognize the beginning of trends. However, he also has its limitations and you should especially watch out in strong trends, since the values ​​often jump over the ties 20 and 80, without leading to a correction.