How To Trade With Stochastic Indicator


The Stochastic is momentum indicator that was developed by George Lane in the 1950s. It is a widely used technical indicator that shows the closing price relative to the high/low range of a specified period, most common of them is the 14 days.

It is important to clearly outline that they are 3 different types of stochastic oscillators: the fast, slow, and full stochastic. They all function similarly but basically investors refer to the slow stochastic when they are trading the stochastic technical indicator.

How to Trade the Stochastic Indicator

To trade the stochastic indicator, investors must understand that this indicator is mainly used to indentify overbought and oversold conditions during day trading. The technical indicator comprises of two lines: %K and %D. These lines oscillate in a vertical range between 0 and 100, where readings above 80 are considered to be overbought and readings below 20 oversold.

How To Trade With Stochastic Indicator

Image above clearly shows a stochastic plotted on a EURUSD 1 hour chart with the overbought and oversold conditions.
In order to generate a buy signal, investors would have to watch out for the %K line cross above the slower %D line and the line previously crossed below 20. For a sell signal the %K has to cross below the %D and the line must previously crossed above 80.

On our chart the light sea green is the %K while the %D is the red line (image below)

Stochastic Oscilator

The Stochastic Crossover

Investors can trade this method to generate signals for currency pairs by watching the %K and %D line cross. You can employ this trade tactic by going bullish when the faster %K crosses below the %D line within the oversold region and bearish when the faster %K crosses above %D within the overbought range.

Buy Signal

Stochastic and ChannelsChannelsChannels

Image above shows a buy alert using the stochastic indicator. To initiate a buy signal traders must have to allow the stochastic lines venture into the oversold region. We’ll need to also see a stochastic cross. Once the two parameters are set, we are sure to have a buy alert.

Sell Signal

Stochastic Signal

We saw a sell signal as seen in image above; as the chart clearly shows the trade and stochastic implication as a lagging indicator.

Note: The Stochastic is a lagging indicator and its best used in conjunction other indicators. Stop loss for trades should be place below the last low or high. They signals yields good trades. The charts represented are charts that are on a 1 Hour timeframe (EURUSD). I’ll advice a 4hr chart incorporation into your Stochastic trade style.

Stochastic MT4 Indicators