How to use this guide
To get the most out of this guide, it’s recommended to practice putting these stochastic indicator trading strategies into action. The best risk-free way to test these strategies is with a demo account, which gives you access to our trading platform and £10,000 in virtual funds for you to practice with. Get your free demo account.
Once you’ve found a strategy that consistently delivers profits, it’s time to upgrade to a fully-funded live account where you can profit from your new-found edge.
What is a stochastic oscillator?
The stochastic oscillator measures the momentum of price movements. Momentum is the rate of acceleration in price movement. The idea behind the stochastic indicator is that the momentum of an instrument’s price will often change before the price movement of the instrument actually changes direction. As a result, the indicator can be used to predict trend reversals.
The stochastic indicator can be used by experienced traders and those learning technical analysis. With the help of other technical analysis tools such as moving averages, trendlines and support and resistance levels, the stochastic oscillator can help to improve trading accuracy and identify profitable entry and exit points.
Stochastic indicator formula
The stochastic indicator is calculated using the following formula:
%K = 100(C - L14) / (H14 - L14)
where:
C = the instrument’s most recent closing price
L14 = the instrument’s lowest price of the 14-day period
H14 = the instrument’s highest price of the 14-day period
How does the stochastic indicator work?
The indicator works by focusing on the location of an instrument’s closing price in relation to the high-low range of the price over a set number of past periods. Typically, 14 previous periods are used. By comparing the closing price to previous price movements, the indicator attempts to predict price reversal points.
