Stochastic Oscillator

What is a Stochastic Oscillator? 

Developed by George Lane, the stochastic indicator essentially acts as a momentum guide. This is used to gauge potential future direction in trending markets by spotting the areas where the beginning of a change in direction can take place. 

A stochastic usually show the traders the relationship between the closing price and the previous high-low price range over a specified period of time. According to Lane himself, the aim of the stochastic oscillator is not to track price nor volume, but the speed of flow or momentum.

The stochastic oscillator is calculated with below formula 

K line ( blue below)  = 100 [(C – L5 Close)] / (H5 – L5)

  • C = the most recent closing price
  • L5 = 5 session low
  • H5 = 5 session high

D line (red dotted below) = 100(H3 / L3) 

  • H3 = 3 session high
  • L3 = 3 session low 

Type of Stochastic’s?

Stochastic’s fall under the oscillator umbrella of indicators. Under this umbrella are the likes of the MACD,  Average True Range and DeMarker. Although separate if their individual functions they have similarities in what they hope to show a trader. 

When it comes to stochastic’s, and beyond the stochastic oscillator itself, another type which is closely aligned to it is the Relative Strength Index. We look at both below.

Stochastic Oscillator 

Here you see the 2 lines detailed above (K/D) with a range on the y-axis 0-100, with 20 and 80 the other headline numbers. The K line moves faster than D, however when the 2 meet and crossover is where you see the momentum change.

The red circles show where the momentum changes after an upwards trend, then reversing and sellers enter, this change begins to take place the closer it gets to 80.The blue circles show where the momentum changes after a downwards trend, then reversing and buyers enter. This change begins to take place the closer it gets to 20.

Relative Strength Index

Here you see a range on the y-axis 0-100, with 30 and 70 the other headline numbers. The red circles show where the momentum changes after an upwards trend, then reversing and sellers enter. This change begins to take place the closer it gets to 70. The blue circles show where the momentum changes after a downwards trend, then reversing and buyers enter. This change begins to take place the closer it gets to 30

How can you use Stochastic’s to buy/sell?

In spotting the momentum of the markets and the correlation between close (price) and the price range (high-low), a trader can use this information to see if a market is either overbought or oversold.

As seen above, when the markets reach close to 80, they may believe that the potential for a turnaround exists as the markets are near overbought levels. So a trader may look at the possibility of selling a market at this level.

When below or close to 20, this is closer to being oversold, so a trader may look at this as a good level to buy. 

Generally no indicator should be used as a standalone, but rather just one of many driving forces in helping to make an overall decision. 

Brokers that offer Stochastics on their platform

eToro
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Min Deposit
$50
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Start Trading View key features
Key Features
Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Top Coins
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eToro offers a wide range of cryptos, such as Bitcoin, XRP and others, alongside crypto/fiat and crypto/crypto pairs. eToro users can connect with, learn from, and copy or get copied by other users.
Cryptoassets are highly volatile unregulated investment products. No EU investor protection. eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.
FOREX.com
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Min Deposit
$50
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Start Trading View key features
Key Features
Trade on popular Crypto markets
Go long or short on cryptos from 10p a point
A trading partner you can trust
Top Coins
Payment Methods
Debit Card, Bank Wire, ACH, Credit Card, PayPal
Founded in 1999, part of GAIN Capital Holdings. Licensed in highly regulated juristictions, FCA, IIROC, NFA, CFTC, CIMA,FSA. Payment methods ACH, debit card, bank wire transfer. $50 minimum deposit.
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Margin Trading
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Margin Trading
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Cex.io offers exchange of fiat currency for Bitcoin Ethereum, Tether, and 23 other cryptocurrencies, as well as Bitcoin/Ethereum trading against the USD.
Bittrex
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Key Features
One of the largest cryptocurrency exchanges
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Huge range of cryptocurrencies
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Top Coins
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Cryptocurrencies
Binance has grown exponentially since it was founded in 2017 and is now one of, if not the biggest cryptocurrency exchanges on the market.
Coinmama
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Safe & Secure cryptocurrency exchange
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Min Deposit
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Safe & Secure cryptocurrency exchange
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Liquidity Accepted in over 200 countries
Top Coins
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Payment Methods
Credit Card
Coinmama is a bitcoin broker based in Israel. They specialize in selling bitcoins for credit card to nearly anyone in the world.
Coinbase
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Trusted provider
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Min Deposit
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Trusted provider
Online Wallet
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  • BTC
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Payment Methods
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Coinbase is one of the first places that made it easy to buy bitcoin and has since become a widely trusted exchange in the market.

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