Stochastic oscillator – what is it
A stochastic oscillator is an indicator of the moment that shows the current position of the price relative to the price ranges for a certain period in the past through an upward or downward divergence from the price of the underlying asset. At the same time showing oversold or overbought excess levels. These indicators were designed to offer an analysis based on the location of the closing price for a certain period.
- How can the indicator help
- What are the levels of overbought and oversold
- What are an Optimistic Divergence and Bearish Divergence
How can the indicator help
A stochastic oscillator has a predetermined range that starts from 0 and goes to 100. This makes it a related indicator. No matter how far the price moves, or how fast it moves, it should remain between 0 to 100 range. The stochastic oscillator was designed to anticipate turns in the direction of prices based on the basic theory that the impulse turns before the asset’s price.
Although it is relatively difficult to calculate the stochastic oscillator in comparison with other technical indicators, everything is exactly – this is one of the widely used Forex indicators on the market.
What are the levels of overbought and oversold
The main reason why this indicator is used is to recognize the different levels where the financial market is either overbought or resold. This can lead to a loss of momentum, and therefore leads to a change in the direction of the price. Traditionally, investors are considering a generator range of 80 or higher, from where the price could change its direction and drop significantly below 20, and become oversold. This is the reason why traders usually use other technical indicators, including candle patterns and moving average values, to establish the signals produced by the stochastic oscillator.
What are an Optimistic Divergence and Bearish Divergence
Divergences are decisive warning signals that show Forex trends. Therefore, the identification of an optimistic or bearish discrepancy is another way to use this indicator as a direction for changing the indicator. This indicator allows traders to limit their risk. An optimistic discrepancy is an upward divergence from the price. This indicates a likely change from the downward movement to the upper deflecting movement. Usually this happens when the price has reached a minimum, and the stochastic is not. This shows a decrease in the downward momentum. On the other hand, the Bearish Divergence means a downward divergence from the price. Usually this happens when the price reaches a maximum, and the oscillator does not. This indicates a loss of growth momentum and a likely reversal down. Consequently, as overbought and oversold levels, it is best to use a price divergence.