Stochastic Oscillator

Chart 1.

stochastics oscillator is a momentum indicator that uses support and resistance levels

You have the option to change the %K and %D periods of the Slow Stochastic above. The default %K and %D periods are set to 15 and 5, respectively.

Question? What are the parameters should set for stochastics oscillators?

The default settings (14,3,3) is fast enough to use in 30-minute and 1-hour charts.Well, that depends on how "sensitive" you want your oscillator to be. The smaller the stochastic parameters, the faster it will react to market changes and the more crossovers will be shown. Stochastic settings of (5, 3, 3) are highly sensitive and are useful for detecting rapidly changing market trends but it tends to be too choppy and prone to fake-outs. My stochastic is set at (14, 3, 3), where 14 stands for the %K line, 3 is for the %D or signaling line, and 3 is the smoothing parameter.

The MACD is most effective in wide-swinging trading markets. There are three popular ways to interpret the Slow Stochastic:

1. Buy when the Oscillator (either %K or %D) falls below a specific level (e.g. 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g. 80) and then falls below that level.

2. Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line.

3. Look for divergences. For example, where prices are making a series of new highs and the Slow Stochastic Oscillator is failing to surpass its previous highs. - "Technical Analysis from A to Z" by Stephen Aechlis.

EMA3(%D) is a 3-period exponential moving average of %K.
EMA3(%D − Slow) is a 3-period exponential moving average of %D.

A 3-line Stochastics will give you an anticipatory signal in %K, a signal in the turnaround of %D at or before a bottom, and a confirmation of the turnaround in %D-Slow. [3] Typical values for N are 5, 9, or 14 periods. Smoothing the indicator over 3 periods is standard.

Stochastics predicts tops and bottoms.

Interpretation
The signal to act is when you have a divergence-convergence, in an extreme area, with a crossover on the right hand side, of a cycle bottom.

As plain crossovers can occur frequently, one typically waits for crossovers occurring together with an extreme pullback, after a peak or trough in the %D line. If price volatility is high, an exponential moving average of the %D indicator may be taken, which tends to smooth out rapid fluctuations in price.

Stochastics attempts to predict turning points by comparing the closing price of a security to its price range. Prices tend to close near the extremes of the recent range just before turning points. In the case of an uptrend, prices tend to make higher highs, and the settlement price usually tends to be in the upper end of that time period's trading range. When the momentum starts to slow, the settlement prices will start to retreat from the upper boundaries of the range, causing the stochastic indicator to turn down at or before the final price high.

An alert or set-up is present when the %D line is in an extreme area and diverging from the price action. The actual signal takes place when the faster % K line crosses the % D line.

Divergence-convergence is an indication that the momentum in the market is waning衰退 and a reversal may be in the making. The chart below illustrates an example of where a divergence in stochastics relative to price forecasts a reversal in the price's direction. Please see Chart 1

Stochastics pop
This is when prices pop through and keep on going - that is, break out.
Rules to follow:
Increase long position — When price crosses the upper band from below. RSI <50,k%>D%
Increase short position — When price crosses the lower band from above. RSI >70,D%>k%
Liquidate position — When Stochastic %D crosses %K in direction reversed to open trade