Stochastic Indicator Guide – Being developed by Georce C. Lane in the 50s, the stochastic indicator one of the most popular and oldest types of tools and, this tool has been used by the most recent novice traders who are experienced. Plotting and evaluating it is quite easier and it has been considered as one of the simplest tools of the time. There is no denying the fact that this tool also generates some false signals on the chart of price trends and the marketing pattern although the traders and analysts find it quite easier to illustrate and interpret the corresponding data and information about a particular downtrend or uptrend.
Some of the good components shown on the above chart are the %K that is fast and %D which is usually shown, clearly in blue and red respectively. It is discussed below how the calculations are made.
Calculation of the Stochastic Indicator
Basically two parts constitute the stochastics indicator. We will discuss here about the %K component as it is itself an oscillator which is usually provided as Williams Oscillator in almost every software tools available in the market. The calculation is shown below:
%K = 100 * (Recent Close – Lowest low) / (Highest High – Lowest Low)
We see here that the indicator value is calculated on a particular timeframe and the variables here applied like the highest high and lowest low are the same values which are created in the chart.
The recent range in the chart with respect of the maximum that has been registered in the given time frame is clearly depicted by the %K component. Suppose, 50 pips is the most recent range and 100 being the largest, component value will result in 100 * 50 / 100 = 50, that clearly shows that in the given analysis time period, only 50 percentile contributes to the latest range of the maximum registered value.
On the other hand, %D is nothing but the 3-period MA of %K. in order to derive the signals both are plotted on the same chart. It should be seen here that based on the sensitivity degree in context of the latest pricing pattern, the MA may be either simple or exponential.
Both the types of the stochastics indicators namely slow and fast have the same mechanism of calculation except that the slower one exhibits a loner time span while it moves over the %K component in order to smooth the various crossovers and volatile indicator. Emitting small number of trading signals, the slow stochastic indicator is comparatively better and reliable.
Trading with Stochastics Indicator
The stochastics indicator is similar in nature and calculation technique like RSI for determining the overbought/oversold levels and it basically applied in the case of range pattern. 20 and 80 are the oversold and overbought levels respectively. Since, this indicator usually generates false signals tending it as a rarely used tool although it is popularly used. You may sought for the convergence/divergence patterns or oscillators between indicator and the price level, you may also use secondary concepts like price extremes or crossovers which lead to the changes in the momentum signals.
%K component movement is always the sole basis to create indicator crossovers by both the slow and fast stochastics indicators. %K is always the fast moving indicator and when it usually rises or falls below the %D, generation of a buy or sell signal occurs.
You can access the software of stochastic indicator anywhere in the market because it has been one of the most reliable and popular toolbox.
Stochastic MT4 Indicators
You have standard stochastic indicator in every MetaTrader platform, here is more stochastic indicator versions.
Since the stochastics indicator is mostly used in the ranging market, most of the traders can use it in a safer environment while implying the simple techniques like crossovers or overbought/oversold levels so that you can formulate the trading strategies. You can also implement the concept of divergence/convergence given the case is more complicated in the market. This can be also used while getting the volatility indicators in place and also, you may pick the most reliable configurations with the help of moving averages. You may choose a less volatile level for ranging market as per illustrated by the Bollinger Bands or the ATR, for using it any trendless markets.
Though it has been seen that most of the traders and analysts use the stochastic indicator in ranging markets yet it is recommended that, if you depend on oversold/overbought levels in trading markets. Usually due to the breaching of limits, it may seem that the trending markets are brutal. It may be critically harmful if are testing this indicator with range indicators.