Stochastic Oscillator: Definition, How to Set Up, and Use

Ada banyak indikator forex yang bisa digunakan trader untuk meraih profit optimal, selain indikator RSI dan Fibonacci, ada indikator stochastic yang membuat perhitungan trading Anda semakin akurat. There are many forex indicators that traders can use to achieve optimal profits, in addition to the RSI and Fibonacci indicators, there are stochastic indicators that make your trading calculations more accurate. The Stochastic is one of the popular indicators that is often used. Before continuing to the discussion about this stochastic indicator, you can register yourself by becoming an IB or invite your friends to the GICAaffiliate program so that you can get additional income and bonuses as an affiliate.

Stochastic is an indicator to assess the strength of a trend

Since it was developed by George Lane in 1950, the stochastic is still one of the most popular forex trading indicators to this day. The Stochastic is a useful indicator for assessing the momentum or strength of a trend. This indicator predicts the price over a specific period of time with the closing price during that period. The basic principle of stochastic is that when a currency is in an uptrend, then the price will close near the previous high and if a currency is in a downtrend, then the price will close near the lowest price level. The stochastic indicator is very sensitive to price movements in the market and swings up and down more often than other momentum indicators. The Stochastic oscillator is a forex indicator that can give you a clue when is the best time for a trader to buy or sell. 

Although the accuracy cannot be 100%, traders can still improve the accuracy of the indicator by combining it with other indicators, or with proper money management. You can apply this Stochastic indicator to the trades you make. To trade itself, you can join GIC by downloading the GIC application on the Play Store or App Store on your Smartphone.

How to use the stochastic indicator?

The main use of the stochastic indicator is to detect overbought and oversold conditions in trading. In this indicator, you can see that there are two lines in the oscillator which are often referred to as the %K line for blue and the %D line for red which is usually displayed as a dotted line. In contrast to Fibonacci which can only be used in a downtrend or in an uptrend. Stochastics can also be used when market conditions are sideways. Sideways is a market condition when it is flat, where there is doubt in the market. Bullish (rising prices) and bearish (falling prices) are both strong causing sideways conditions. Stochastic indicators in forex trading are usually used based on three references, namely overbought and oversold levels, crossover points, and divergences. Here's the explanation.

1. As overbought and oversold markers

The stochastic indicator is an indicator that measures the upward and downward movement of the price in the range of 0-100. If it is at 80 or greater, it means that an asset has been overbought, so it is likely that the price will turn down or correct.

For traders, this means time to sell. However, if it is at 20 or less, it means that an asset has been oversold, so it is likely that the price will turn up.

For traders, this means time to buy. However, this signal cannot be relied upon if the price trend is in a strong position. Therefore, forex traders should make sure of these two other references.

2. Seeing the line intersection point jelly (crossover)

Unlike the RSI indicator which has only one signal line, in the stochastic indicator, traders can see two lines that are often referred to as the %K line for blue and the %D line for red which are usually displayed as dotted lines. 

The two component lines of this stochastic indicator are displayed simultaneously below the price chart. The %K line measures the current rate of price change and is often referred to as the fast stochastic, while the %D line is the moving average of the %K line and is called the slow stochastic.  

What is the difference between stochastic slow and fast? Fast stochastic is a stochastic indicator line that reacts faster because it uses calculations with the latest price data but can produce wrong signals while stochastic slow is a stochastic indicator line that reacts slower and uses the calculation of an average value (moving average), although it takes more time to generate a signal, but the results will be more accurate.

If using the stochastic indicator formula, the calculation for %K and %D for a given period is as follows. %K (N)= 100 x (Close Price - Low Price) / (High Price - Low Price) Close price is the closing price in the N period, while low price is the lowest price in the N period, and high price is the highest price in the N period. George Lane, the person who developed the stochastic recommended a period of 14 or N=14 for standard use.

Traders can also use periods 9 and 21 as an alternative. Then, how does the stochastic indicator find trade entry signals? Well, for this you can pay attention to the crossing line intersection point between %K and %D, because %K acts as a fast stochastic and %D is a slow stochastic, then a buy signal appears when %K crosses %D from the bottom up.

Conversely, a sell signal occurs when %K cuts %D from top to bottom. If this crossover is in the overbought and oversold area, then you can get a more confirmed trade entry signal.

Simply put, the way to read the stochastic indicator as a trade entry guide is to recognize the crossover of the %K and %D lines in the overbought and oversold zones. Simply put, the way to read the stochastic indicator as a trade entry guide is to recognize the crossover of the %K and %D lines in the overbought and oversold zones. Simply put, the way to read the stochastic indicator as a trade entry guide is to recognize the crossover of the %K and %D lines in the overbought and oversold zones.

3. As a marker of divergence

Like other oscillator indicators that are useful as momentum indicators, the stochastic is one of the mainstay indicators in divergence analysis. Therefore, the way to read and use the stochastic indicator is to rely on the highs and lows formed from the signal lines.

When the stochastic chart shows a declining high or low, it indicates a weakening of momentum. Conversely, the way to read the stochastic indicator when the momentum is strengthening is to pay attention to the increase in the high or low of the signal line. 

Price strengthening is usually marked by an increasing high. However, actually the momentum is weakening, because the high stochastic will decrease. This shows that bullish prices are not supported by real momentum. 

So, it can be concluded that if the market condition is in an uptrend position, the price will turn around following the decline in momentum. If you still don't understand this indicator, you can measure your skills in the Preliminary Test and see how good you are in trading!

How to set an accurate stochastic?

For beginner traders, setting up the stochastic indicator may seem complicated, you can follow the following method.

1. Open your Metatrader platform

Choose the chart view of the currency pair and timeframe. The stochastic indicator can be used on all timeframes.

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2. What is the stochastic indicator setting?

First go to the 'Chart/Chart Menu' on your trading platform, then click on 'Insert', select 'Indicators', then 'Oscillators', after that select 'Stochastic Oscillator'.

3. Changing Parameter Settings  

After the stochastic indicator settings display appears, traders can change the number of stochastic oscillator parameters. The standard parameters are 5, 3, 3 and the ones that are often used for stochastic are 14, 3, 3 and 21, 5, 5. 

Stochastic is often referred to as a fast stochastic if parameters 5, 4 are used. Meanwhile, slow stochastic with parameters 14, 3, and full stochastic with parameters 14, 3, 3. The fast stochastic responds to price changes in the market quickly, while the slow stochastic reduces the number of false signals.

Traders can choose the parameters as needed. Still confused about using this indicator? You can consult directly by filling out the Trader Assessment and consulting with GIC.

What are the advantages of trading using the Stochastic indicator?

As previously written, the stochastic is one of the indicators that is often used by traders. In addition to its fairly simple theory and practice, this indicator also has various advantages. The advantages of stochastic are:

Give Signals When Price Weakness Occurs

The stochastic indicator will give a signal at the time of price weakness on the exchange. Thus, traders can use a stochastic indicator signal as one of the cornerstones in making decisions in trading.

Stochastic Indicator Is More ''Sensitive''

Stochastic indicators also have another characteristic of being ''sensitive''. Of course, this is one of the advantages as well. Unfortunately, this advantage can also be a disadvantage. With its ''sensitive'' nature, this indicator will show signals early, it will also potentially catch false signals. To avoid these false signals, due to their sensitive nature, you need more than %D to smooth them out.

You Can Apply It to a Sideway and Profitable Market

This is also an advantage of the stochastic indicator, where its use is very flexible. This indicator can be applied to a flat market, or a market that is in a profitable phase.

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