Stochastic Indicator (stochastic) is used for technical analysis and refers to a group of oscillators. This indicator compares the closing price and ekstrimumov for a certain period of time. In principle, the indicator shows the gap closing price of the specified period of relative prices of the previous period within a specified time period. The author of the stochastic indicator is George Lane.
Stochastic indicator, like other oscillators, and shows good results as a rule on non-trend, period. Often it is used with levels of 80 and 20, as recommended by the author of this creation, George Lane. Period in the indicator chosen depending on the trading strategies. For example, if the stochastic - the only tool for decision-making is generally used it for a longer period - so it gives fewer false signals, although the total number of signals is reduced. If it is used in conjunction with the trend indicator, it is possible to use smaller periods.
The Stochastic indicator represents the two lines:
Fast Stochastic indicator -% K (usually green continuous line)
Slow Stochastic indicator - D% (usually dotted red line. Slow Stochastic is also called a moving average of% K)
The formula for calculating the Stochastic indicator:
% K = ((C - Ln) / (Hn - Ln)) * 100
From here - the closing price of the current period
Ln - minimum price for the last n periods
Hn - the highest price in the last n periods
% D = is nothing like a line moving average relative% K with a small period of averaging. You can use different mechanisms to averaging (simple average, weighted, exponential, smooth).
There are three main Stochastic indicator methods of trading based on the testimony of the stochastic
1) Trade at the intersection of lines Stochastic indicator
This is perhaps the most popular use of this indicator. Trading signal in this case - the intersection of the indicator lines and K% D%.
If the line crosses the K% down the line D% - it is a signal to sell.
If the line crosses the K% upward line D% - this is a buy signal.
It should be noted that if the data line crossed below 20 or above level 80 then it is a much stronger signal than if these lines are relocated within the boundaries of these levels. Trade at the intersection of the lines gives the frequent signals, but many of them false, it is desirable to filter out Stochastic indicator signals from this indicator to other indicators.
2) Stochastic indicator Trading in the zones oversold \ overbought.
Typically, Stochastic indicator readings above the 80% overbought mean, respectively, when less than 20% - oversold. The principle of this method of trading is sledueschem: for example, the stochastic line went above 80%, now waiting for the line will start to turn and drew level with a threshold of 80%, at this point, opening the deal to sell. And vice versa - when the Stochastic indicator fell below 20%, and began to climb, returning to 20%, opening the deal to buy.
3) Stochastic indicator Trade on divergences.
This Stochastic indicator method is based on finding divergence (divergence) with the price. The principle is this: when the price for a specific period of time creates a "record" local minima, and stochastic
shows higher lows, there is divergence, ie, the divergence indicator reading directions to the price. In such a situation is more likely to turn up the prices. Conversely, when the price of registering a new "record" a local maximum at this point in time, and stochastic shows no local maximum, then the most probable price reversal down.
As a rule, the Stochastic indicator divergence is not fully expect, and use it together with a penetration level of oversold and overbought (20 and 80).
In principle, this indicator can be used not only in the FOREX and the stock market. This indicator includes a complete set Meta Trader4 («Stochastic Oscillator»)
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