# Stochastic Oscillator Indicator Guide

The MT5 stochastic oscillator Indicator is a range-bound indicator created by “George C. Lane” in the late 1950s. This two-line indicator oscillates between 0 and 100. In effect, thanks to its versatile nature, the stochastic oscillator MT4 Indicator stays one of the most popular technical indicators used in the Forex and crypto markets. In a way, he is very helpful when it comes to foreseeing tendency reversals. On the other way, he focuses on price strength and we can use it to determine overbought and oversold areas. Furthermore, the stochastic oscillator Indicator for Tradingview is based on the idea of following the speed of the price. So he could signal an actual movement just before it occurs. However, using a stochastic oscillator strategy can assist to enhance trading accuracy and identify promising entry and exit points.

## What is stochastic oscillator indicator ?

The stochastic oscillator is a technical indicator that compares a certain closing price of an asset to the high-low range of its prices over a certain period of time. Usually, we use 14 previous periods. For instance, when we use a weekly chart, that means 14 weeks and, on a daily chart, this will be 14 days. Thus, we can control the sensitivity of the indicator to market movements and changes by modifying and adjusting the time periods. Actually, the Stochastic oscillator strategy commonly consists of two lines. The %K and the %D. The %K reflects the actual value of the oscillator for each session, while the %D reflects the three-period SMA of %K. In effect, this two-line indicator fluctuates between 0 and 100 and we can use it in any chart and for any timeframes.

## Stochastic Oscillator formula

We calculate the stochastic oscillator as follows:

%K = 100 * [ ( C – L14 ) / ( H14 – L14 ) ]

Where

%K: The present value of the stochastic oscillator.

C: The most recent closing price of the instrument.

L14: The instrument’s lowest price of the 14-periods.

H14: The instrument’s highest price of the 14-periods.

%D= 3-period simple moving average of %K.

We can insert the stochastic oscillator from the indicator list in both platforms Metatrader and Tradingview.

## How to trade with Stochastic Oscillator indicator ?

There is a variety of utilization for the MT5 stochastic oscillator. In a way, the general rule for the stochastic oscillator is that when the indicator is at a high level, it means the asset’s price is closed near the top of the 14-period range. Contrary, when the indicator is at a low level, it tells that the price is closed near the bottom of the 14-period range. While the indicator is moving between 0 and 100, we can interpret different readings:

• A reading above 80: shows that the asset is trading around the top of its high-low range.
• Remarking a reading below 20: informs that the instrument is trading near to the bottom of its high-low range.
• A reading above 50: signals that the asset is moving within the upper portion of the trading range.
• Noticing a reading below 50: displays that the instrument is moving in the lower portion of the trading range.

Hence, by comparing the closing price to earlier price movements, the stochastic oscillator aims to anticipate turning points. So we can use it to generate overbought and oversold trading signals. Thus, let’s figure out how we can use the stochastic oscillator for Tradingview to identify important areas.

• ### Detecting overbought and oversold areas

In a way, if the indicator lines are above 80, we can make a judgment that the asset is overbought. On the other side, we consider the asset oversold when the lines are below 20. Therefore, in a basic overbought and oversold strategy, Forex traders can use the MT4 stochastic oscillator to determine exit and entry points. Typically, we can place a buy trade when the asset is oversold. We often detect this buy signal when the stochastic oscillator is below 20 and then rises above it. In contrast, we will place a sell trade when the asset is overbought. We frequently spot a sell signal when the indicator is above 80 and then falls below it. As a matter of fact, overbought and oversold zones are helpful for predicting trend reversals.

However, we should know that we can’t trust always the overbought and oversold levels because they can be tricky. Forex traders should know that the asset won’t necessarily drop in price just because we consider it overbought. Similarly, an asset won’t automatically rise in price just because we consider it oversold. Briefly, those areas simply indicate if the asset is moving around the top or bottom of the range.

• ### Identifying divergences

Another popular MT4 stochastic oscillator strategy is about identifying divergences. Thus, Forex traders will look to see if the asset making new highs and lows while the indicator isn’t. This can deliver signs that the current trend is weakening and may soon reverse.

In this case, a bullish divergence happens when the price of a given asset forms a lower low, but the indicator makes a higher low. So as we notice that the selling pressure is decreasing, a reversal upward may occur. On the other side, a bearish divergence happens when the price forms a higher high, but the indicator makes a lower high. Then we will remark that the up tendency is slowing. So a reversal downtrend could occur. Generally, it is very important to Forex traders to make sure that the divergence is confirmed by a true reversal because the asset price can keep rising or falling for a long period, even while divergence is happening.

• ### Using crossovers

The MT5 stochastic oscillator Indicator crossover is also a well-known strategy used by Forex traders. We can consider that the intersection of the two lines is a sign that a reversal may be in the works, as it indicates a large change in momentum. This happens when the two lines cross in an overbought or oversold area. On the one hand, when an increasing %K line crosses above the %D during an oversold period, then we should look for a long position (buy signal). On the other hand, when a decreasing %K line crosses under the %D line during an overbought period, then we should look for a short position (sell signal). Yet, these clues tend to be more accurate in a range-bound market while they seem to be less reliable in a trending market.

Stochastic oscillator Indicator for MT4 ( Metatrader 4 ) presents a valuable instrument that helps Forex traders to know better when to open and close positions. Actually, understanding this MT4 indicator divergence can be very useful. As we can use it to predict trend turnaround. So catching a bullish or a bearish divergence will allow us to make more effective decisions by indicating the expected direction of the price.