What is the Stochastic Oscillator?
The Stochastic Oscillator is an indicator that compares the most recent closing price of a security to the highest and lowest prices during a specified period of time. It gives readings that move (oscillate) between zero and 100 to provide an indication of the security’s momentum.
Stochastic Oscillator Formula
- C is the last closing price
- Lowest Low is the lowest low for the time period
- Highest High is the highest high for the time period
Uses of the Stochastic Oscillator
Identify overbought and oversold levels
Limitations of the Stochastic Oscillator
While the adjustment to 85/15 does reduce the number of false signals, it may lead to traders missing some trading opportunities. For example, if during an uptrend, the oscillator reaches a high reading of 82, after which price turns to the downside, a trader may have missed the opportunity to sell at an ideal price point because the oscillator never reached their required overbought indication level of 85 or above.
If you don’t like the standard Stochastic Oscillator, you can try the Advanced Stochastic Scalper :
- Advanced Stochastic Scalper for the MetaTrader 4 terminal : https://www.mql5.com/en/market/product/28824
- Advanced Stochastic Scalper for the MetaTrader 5 terminal : https://www.mql5.com/en/market/product/30312
A Final Word on the Oscillator
The Stochastic Oscillator is a popular, widely-used momentum indicator. Traders often use divergence signals from the oscillator to identify possible market reversal points. However, the oscillator is prone to generating false signals. Therefore, it is best used along with other technical indicators, rather than as a standalone source of trading signals.