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What are Stochastic Oscillators?

 

Stochastic OscillatorsThere are three kinds of oscillators available in the market. Among these three the most popular is the stochastic oscillator. Stochastic oscillators are used for tracing the inflation of price rise in the stock market. These kinds of oscillators are highly advanced indicators that follow the speed of market price. It was designed by George Lane in the 1950s to foreshadow the reversal of price of commodities. It was the most important and effective signal invented by Lane.

 

How does a stochastic oscillator work?

A stochastic oscillator indicates the overbought and oversold levels of commodities. If a stochastic oscillator is set by default you will find 14 periods containing time frames of days, intraday, months, weeks. There are in total three versions of Stochastic Oscillators. The first one is the original version designed by George Lane for %K and %D. a stochastic oscillator ranges from 0 to 100. It is plotted in a graph in the form of a line that indicates whether a particular stock is overbought or oversold. There are many other indicators e.g. RSI (relative strength indicators) and the CCI (commodity channel index). You should the indicator that is most beneficial for your purpose. When the stochastic line comes below 20 it means the stock is oversold. And when the line goes above 80 it indicates that the stock is overbought. The setting of stochastic oscillator plays a significant role in using the device. It is set to 14 in the %K parameter and used by most stock traders. But in the MT4 parameter it is set to 5.

The word oscillator is derived from a Latin word “oscillo” which means “I swing”. Technically, the stochastic oscillator gives you the mathematical expression of fluctuation of price of stock over a given timeframe. You can adjust the levels as per your analytical need. It is actually a mechanical indicator by the Forex traders of the past who have become stock traders.

Why is Stochastic Oscillator Special?

It tracks the speed of the price change which is also called the momentum unlike many other indicators that merely track the price. To discard the false trade set up often the traders change the indication marks to 70 and 30. But this is not an advisable idea as the function of the stochastic oscillator is to indicate the price momentum and not the price movements. Since this is a technical tool, it is important to use this indicator along with other analysis tools. You can make your own settings on the stochastic oscillator according to personal preference. Those traders who wish to avail, more trading opportunities, can use this system of trading. If someone follows the weekly or monthly charts, one has to devote some time every weekend to understand the formed and forming trade set ups and then enter the market. Along with the confirmation of the stochastic oscillator, one can follow the profitable and continued stock trends. For the novice traders it may take some time. But even while learning they can enter the trade market with the help of the strong trade set up for which stochastic oscillator is an indispensable indicator.

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About Emaad Qureshi