What the Stoch oscillator shows, and how it can be used in trading.
The Stoch oscillator appeared thanks to George Lane. He is a well-known trader and works for Investment Educators Inc. George spent a lot of time developing the indicator and explained its way of working in his book.The main feature of the oscillator is the determination of the price momentum.
As an example, the developer cited a rocket launched into the sky. Before falling down, it begins to change its speed, the same thing happens with the price. In simple words: momentum always begins to change its direction before a change in value. George also claims that this method of determining the price is quite difficult to study, but it fully justifies itself.The oscillator indicates the relationship between the price range and the closing price (the range can have values from 0 to 100).
If the value is greater than 75, then the closing price has a high indicator and is at the upper limit. If the indicator is 25, then it is approaching the lower limit. The following designations are accepted in the market: the range from below is bearish, from above is bullish.The Stoch Formula
The formula below is used to calculate Stoch:
The explanation of the formula is as follows:
max(Hn) - maximum value;
min(Ln) - minimum value;
C0 is the closing price.
Many have noticed that the formula is similar to the formula for calculating limestone during ore melting.
If you look at the oscillator in the form of a graph, it will be represented as two lines.Setting up and using Stoch
Before you start setting the parameter, you first need to look at the recommendations of the author himself.
Lane recommended setting the period from 9 to 21. The default settings have periods 5 and 3. If we talk about charts, the developer recommends using daily and weekly indicators, in this case you can see more truthful signals.The rule also applies perfectly to Stoch, as well as for other oscillators: use during sideways movement with other indicators.
Overbought and oversold Stoch zones
The oscillator has overbought and oversold zones with indicators less than 20% and more than 80%.
If the indicator is at the upper limit, then it can soon be expected to fall and vice versa. Using the chart, you can track the signal to enter a short position: the %K line will cross 80% from top to bottom. Also, %K can cross the level of 20% — this is an excellent signal to buy.Such a signal can also be used in the sidewall, but it is better to wait for the results of other indicators and analyze them.
It is not necessary to focus on 20 and 80%, such values can also serve as a signal: 19%, 25%, 89%.Stoch Divergence
Divergence is called bearish when the price is at the minimum value, and the local oscillator is above the average.
With bullish divergence, the opposite is true: the price is at the maximum, and the maximum on the oscillator is lower than the past. Having received such a signal, we can conclude that the price will soon change in the opposite direction.Intersection of Stoch lines
The 50% line is crossed by the %K line, if it goes down, then this is a sell signal and vice versa, up is a buy signal.
It is recommended to use this signal together with others, so you will get a more truthful forecast. Also, using the %K and %D lines, you can notice buy and sell signals. If %K stops %D from the bottom up, then this is a sign of a sale and vice versa.Thus, Stoch is one of the most popular oscillators.
To get the right signals, it must be properly configured and correctly recognized. A good system is obtained in combination with RSI.
