The founder of the stochastic oscillator, George Lane, believed that divergence could also be used to predict bottoms or tops. He called this a bull or bear set-up, as the indicator would reach a top or bottom which preceded the market changing direction.
Stochastic Chart Indicator - Stochastic Oscillator Definition
A bull set-up is the opposite of a bullish divergence. It occurs when the market price forms a lower high, but the stochastic oscillator reaches a higher high. Even though the asset itself did not reach a new high, the optimism from the indicator is a sign that the upward momentum is strengthening. A bear set-up is the inverse of a bearish divergence. It happens when the market price forms a higher low, but the stochastic oscillator falls to a lower low.
Even though the asset held its price, the indicator shows there is increasing downward momentum. The stochastic oscillator and relative strength index RSI are both momentum oscillators, which are used to generate overbought and oversold signals. Despite both being used for similar purposes, to identify price trends, they are based on very different theories. The stochastic oscillator is based on the idea that that closing prices will remain near historical closing prices, while the RSI tracks the speed of the trend.
Both oscillators work on a zero to scale, but their signals also vary. The RSI would indicate the market is overbought if it reaches above 70, while the stochastic oscillator would need to reach And the RSI would consider the underlying asset undersold if the indicator was below 30, while the stochastic oscillator would need to fall to Learn more about the relative strength index.
How you choose to use the stochastic oscillator will depend on your personal preferences, trading style and what you hope to achieve. However, there are a few key points that everyone who uses this momentum indicator should know:. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.
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What is the stochastic oscillator?
Related search: Market Data. Market Data Type of market. Writer ,. What is the stochastic oscillator? How to use the stochastic oscillator in trading To use the stochastic oscillator, it is first important to understand exactly what the readings are showing you. We encourage you to visit us regurarly as we continuously add new things to the current list.
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By admin. Stochastic Signal — profitable modification of the best oscillator. How to install the Stochastic Signal on your Metatrader 4 trading platform? Restart your Metatrader 4 Client. Right click on Stochastic Signal. You can modify settings if you need and than click ok. The indicator is ready and running on the chart. In the archives you will find following Metatrader 4 files included: Stochastic Signal.
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