{"id":547847,"date":"2023-04-21T14:00:22","date_gmt":"2023-04-21T12:00:22","guid":{"rendered":"https:\/\/ftmo.com\/?p=547847"},"modified":"2023-05-23T16:12:41","modified_gmt":"2023-05-23T14:12:41","slug":"technical-analysis-how-to-use-stochastic-oscillator","status":"publish","type":"post","link":"https:\/\/ftmo.com\/en\/technical-analysis-how-to-use-stochastic-oscillator\/","title":{"rendered":"Technical analysis – how to use Stochastic Oscillator"},"content":{"rendered":"
In the next part of our series on technical analysis and indicators, we will look at another momentum oscillator, which is known as the Stochastic Oscillator. This indicator measures the speed of movement and momentum of the price of an instrument while determining the trend and its changes.<\/span><\/em><\/p>\n The Stochastic Oscillator was developed in the 1950s by George Lane, who said that the change in momentum or speed of movement of the price of an instrument occurs before the price itself changes direction. George Lane said that the Stochastic Oscillator does not track the price itself, the volume, or anything like that, but it tracks just the speed or the momentum of the price (the strength of the trend). Stochastic in its basic form compares the specific closing price of an instrument in relation to the highest and lowest price over a period of time, usually 14 days (or other time units, depending on the timeframe of the chart the trader is using for trading).<\/span><\/p>\n The idea of the indicator is based on the fact that in an uptrend the price of an instrument tends to close near the high and in a downtrend near the low. However, when prices close further away from the high or low, it means that the momentum is weakening and a change in trend may occur.<\/span><\/p>\n Similar to other oscillators (such as the\u00a0<\/span>RSI, we recently published an article about it<\/span><\/a>), the Stochastic is displayed in a separate chart window and the ranges are between 0 and 100. Although at first glance the RSI and Stochastic are very similar, the main difference is that the RSI takes into account all closing prices in a given period, however, the Stochastic only considers the current price in relation to the highest and the lowest price.<\/span><\/p>\n The Stochastic also displays two lines, however, unlike the RSI, one represents the value of the indicator itself (%K) and the other one represents its three-day moving average (%D). The formula for calculating the value of the indicator looks like this:<\/span><\/p>\n %K= 100[(C – L14) \/ H14 – L14)]<\/p>\n where:<\/p>\n C = the last closing price<\/p>\n L14 = the lowest low for the last 14 periods.<\/p>\n H14 = the highest high for the last 14 periods.<\/p>\n %D = a simple moving average with period 3.<\/p>\n The default values of the indicator are set with the deceleration or smoothing %K value being usually set to 3, which reduces the sensitivity to changes in the price of the instrument.<\/span><\/p>\n 14 periods is considered to be a long enough period for the calculation, but at the same time not too long to react to changes. However, traders who trade on shorter timeframes can set a shorter period and the indicator will then generate more signals for entries.<\/span><\/p>\n<\/a><\/p>\n
What is a Stochastic Oscillator?<\/h2>\n
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Calculation<\/h2>\n