What Is Stochastic Oscillator?

A Stochastic Oscillator helps in figuring out when to buy or sell stocks/cryptocurrencies assets by showing if they're overbought or oversold based on their price history.

Get to Know with Stochastic Oscillator

The Stochastic Oscillator helps traders decide when it's a good time to enter or exit a trade based on whether a financial instrument is overbought or oversold.

It was developed by Dr. George Lane in the 1950s, comparing the current price to a range over a set time.

Comparison of Closing

This indicator shows where a stock's closing price is compared to its high and low range over around 14 days. It's supposed to track the price's momentum rather than other factors like volume or price changes.

What Stochastic Indicator Does?

The Stochastic Indicator tells us what's happening in the market. It gives readings between 0 and 100, with low readings meaning the market might be bearish and high readings suggesting it's bullish. It doesn't go negative or over 100.

Traders usually focus on numbers like 20 and 80. If it's below 20, the market might be oversold, and if it's above 80, it could be overbought. But sometimes, even if it goes way above or below these numbers, it might not mean a change in the market direction.

Divergence

Also, when the Stochastic Oscillator doesn't match the price movement, it's called a divergence. A bullish divergence happens when the price goes lower, but the Stochastic Oscillator shows it's not as bad as before. This could mean things might turn around. On the other hand, a bearish divergence happens when the price goes higher, but the Stochastic Oscillator shows it's not as good as before.

The Best Settings for Stochastic Oscillator

For the Stochastic Oscillator, the best settings are

• % K Length: 14
• % K Smoothing: 3
• % D Smoothing: 3

How to Calculate the Stochastic Oscillator

Here's the formula for the Stochastic Oscillator: 

• H14 = Highest price in the last 14 periods
• % K Slowing Period = Current value of stochastic indicator3
• C = Latest closing price
• L14 = Lowest prices in the last 14 periods

Other Technical Indicators

In addition to the Stochastic Oscillator, traders use other indicators like the Relative Strength Index (RSI) and MACD. Each indicator has its own way of looking at the market. For example, while the Stochastic Oscillator focuses on current market trends, the RSI looks at the speed of price changes to spot overbought or oversold levels. 

The RSI is better for growing markets, while stochastics work well in sideways or turbulent markets.

Also Read

What Is Indicator Negative Volume Index (NVI)?

Understanding Support and Resistance: The Key to Successful Crypto Asset Trading

What is the Bitcoin Misery Index (BMI)?

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.