The stochastic oscillator or a stochastic indicator is a quite well-known technical indicator that helps you predict trend reversals. The indicator puts a major focus on price momentum for a particular asset, and when used right, it can identify both overbought and oversold levels in crypto. The stochastics oscillator is much favored by crypto traders both new and experienced because they’re super easy to understand, and also have a comparatively higher probability of accuracy compared to most other technical indicators.
Now, what is this ‘momentum’ of price movements for a crypto? It can be described as the rate of acceleration in the movement of a certain crypto’s value. The notion of the stochastic indicator is that this momentum in a crypto’s price changes right before a change in direction. Going by this theory, the stochastic oscillator can help you predict a trend reversal.
Notably, the indicator was developed by George Lane back in the 1950s. How the technical analysis tool works is that it measures the correlation between a crypto’s closing price, and its price range in between an earlier, fixed timeframe. Usually, 14 previous periods are used in the calculation. The two-line indicator can be applied to any chart.
The stochastics oscillator reading moves around between the 0 and 100 marks. The indicator portrays how the current price measures up to the highest and lowest values recorded throughout the fixed period of time taken. As we mentioned before, this fixed period will usually contain 14 individual periods. So say for a weekly stochastics indicator chart, the times period will consider the previous 14 weeks.
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<source: cmcmarkets>
The stochastics oscillator gives reading that is measured with two lines: the K line and the D line. The white line below the chart is usually the K line, and the D line- painted in red- is the three-period moving average of the K line.
In general, it is the D line crypto traders pay the most attention to, since it signifies any noteworthy signals in the chart we read.
Here’s the formula the K line follows for the stochastics oscillator:
%K=100×CP−L14/H14−L14
Here,
CP= the most recent closing price
L14= the lowest price of the 14 trading sessions right before
H14= the highest price of those same 14 trading sessions
Now, the formula for the more important D line looks something like this:
D=100(L3/H3)
Where,
H3= the highest of the three preceding trading sessions
L3= the lowest price traded during those three sessions
When the stochastic oscillator is at a high level, it means the crypto’s price closed near the top of the 14-period time range we considered. Therefore, it signifies a bullish market. On the other hand, a lower level reading shows the price closed near the bottom of the 14-period range, implying bearish sentiments.
Crypto traders use other technical indicators like support and resistance levels, moving averages, and trendlines in combination with the stochastic oscillator for yet more precise forecasts.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.