The Stochastic Oscillator Indicator was created in the late 1950s by Dr. George Lane. The term stochastic means the point at which a current price is related to its price range over a period of time. The stochastic oscillator shows two lines (Main and Signal Line) and its support and resistance level. This indicator is included in Metatrader 4 and 5, and the default settings are K% 5, D% 3 Slow 3.
The stochastic indicator is a great tool to identify overbought and oversold conditions over a specific period. The stochastic oscillator is the preferred indicator for many traders when the price is trading in a range because the price itself is oscillating, leading to more reliable signals from the stochastic indicator.
Overview
The stochastic oscillator is a handy indicator when it comes to evaluating the moment or the trend force. The stochastic oscillator, and oscillators in general, are presented in an easy-to-understand manner with transparent buying and selling signals. However, it is likely that excess in these signals, without a deeper understanding of stochastic oscillators, will end in many doubts and frustration for the trader.
To avoid such frustration, new traders will need to have a solid understanding of the underlying mechanics of the stochastic oscillator seen concerning current market conditions.
A stochastic oscillator EA is a timing system that automatically calculates whether the price of a security is over-bought or over-priced over a specified period of time. The EA weighs the most recent price level substantially as a percentage of the (higher, lower) range over a defined period.
The stochastic oscillator EA has two moving lines that oscillate between two horizontal lines. The black line called %K and determined by a specific formula, at the same time as another red dotted line is also a three-period moving average of the %K line..It is concluded that the price is overbought when the two moving lines break above the upper horizontal line and are exceeded when broken below the lower horizontal line.
The oversold line represents price levels that fit the top 80% of the recent price range, over a defined period. Also, the oversold line represents price levels that fall within the bottom 20% of the current price range.
Also, the stochastic EA indicator provides excellent insight when programming inputs. When both lines are above the oversupply line ‘D’ (80), and the %K line crosses below the dotted line %D, a possible short input signal is considered and vice versa when the %K line crosses above the %D line (20).
Traders should not trade blindly based solely on over-purchase/oversold conditions. Traders should understand well the operation of this indicated then to know how the dynamics of the EA is.
FORMULA FOR THE STOCHASTIC OSCILLATOR
The following calculation is presented for a stochastic indicator of 14 periods, but ultimately can be adapted to any desired time frame.
Calculation of %K:
%K = [(C = L14) / H14 -L14)] x 100
Where:
C = last closing price
L14 = Low minimum during period
H14 = Highest during the period
Calculation of %D:
%D = simple moving average of %K (the simple moving average of 3 periods is the most common)
Conclusion
Traders should understand where the stochastic oscillator stands out and where its defects lie to get the most out of the advisor. This is an ideal EA to combine with another trend EA. Like all Eas sold by Quivofx, these have reasonable prices in addition to a free basic version. The Advanced and Pro versions are priced at 29.90 and 39.90 Swiss francs, respectively.
PROS:
Clear input/output signals
Signals appear frequently (depending on time settings selected)
If trading against the trend, prices may remain over-bought/oversold for long periods
Available in most graphics packages
Conceptually easy to understand
CONS:
May cause false signals when used incorrectly
If trading against the trend, prices may remain over-bought/oversold for long periods
This Forex service can be found at the following web address: https://quivofx.com/expert-advisor/stochastic-oscillator-ea
