Stochastic Oscillator: What Is It And How Does It Work?

Stochastic Oscillator

The stochastic oscillator is the creation of legendary analyst George Lane. Also known as the “speed indicator”, the Stochastic Oscillator measures the momentum of movement. It can also be described as the “Momentum of Prices”. In this post, we will find out all about it. Let’s get started.

Stochastic Oscillator: All You Need To Know

What does the stochastic indicator do?

In the cryptocurrency exchange, the Stochastic oscillator, which is positioned in an important place by traders, is one of the most important parts of technical analysis studies. Analysts working in technical analysis identify overbought and oversold areas with the Stochastic Indicator. Afterwards, “sell” is made in overbought regions and “bought” is made in oversold regions. In these regions, two different signals are generated on the indicator as “buying zone between 80-100” and “selling zone between 0-20”. You can also define them as buy-sell signals. If these levels cut upwards, you cannot buy, if the 80 level cuts down, you cannot sell.

Where and why is the stochastic indicator used?

Traders try to identify overbought and oversold zones in technical analysis through the stochastic indicator. For this reason, overbought regions determine the “sell” chance, and oversold regions determine the “bought” chance with the stochastic oscillator. That is, it is used to make the right decision in buying and selling.

The stochastic oscillator takes values ​​between 0-100 to determine the buy and sell zones. Boundaries are determined by placing two parallel lines on the top and bottom of the indicator. The upper zone becomes 80 and the lower zone becomes 20. If the indicator is above 80, it is interpreted that the “overbought” zone is formed. On the contrary, if the indicator falls below the 20 level, it is interpreted as oversold and no investment is made on the relevant coin.  

When the indicator is in the oversold zone, this will not generate a “buy” signal, nor does it mean “sell” when the indicator is in the oversold zone. On the contrary, coming to overbought or oversold zones may indicate that prices can continue their progress in the same direction by accelerating with strong momentum.

One of the most common mistakes made by novice traders using stochastic indicators is that they start with an emotional movement and wait for the indicator value to come back between 80-20 levels. This situation brings nothing but harm.

Calculation logic of the stochastic oscillator

The calculation logic of the stochastic oscillator is to calculate the linear values ​​at %K and %D levels in the formula that composes the oscillator. %K can also be called fast stochastic. The main purpose of the %K level line value is to determine the relationship between the last closing price of the price range during a selected time. Mostly, the 5-day period is used in the selected number of days and it is measured where the closing of the last day occurred within the total price range. No matter how complicated the calculation logic of the stochastic oscillator may seem, once you learn it, you will notice that it is formulated very simply.

The calculation formula of the stochastic oscillator

There are formulas that make up the Scholastic Oscillator. These formulas are symbolized as %K and %D, and calculations are made as two linear values. %K is the master curve and is usually expressed as a solid line. %D is represented as the simple mean of the %K curve and is generally expressed as a dotted line.

  • The %K curve is calculated as follows;
  • %K=100*(SGKF-ED)/(EY-ED)
  • SGKF: Closing price on the last day
  • ED: Value of the bill for the last 5 days
  • EY: The highest value of the bill in the last 5 days (if the last price close is closer to the highest value in the last 5 days, it can be interpreted that the prices will increase, and on the contrary, the prices will decrease.)

What is the %K Formula?

  • %K = 100 [ (C – L5) / (H5 – L5) ]
  • C (Close): Last Closing Price
  • L (Low): The lowest price of the last 5 days
  • H(High): The highest price of the last 5 days
  • In this formula, %D, the slowed line value, is the second variable.
  • The %K line is a 3-period moving average, that is, a 3-day adjusted version.

What is the %D Formula?

  • %D is the 3-day simple moving average of %K.
  • %D = 100 (H3 / L3)

Of these two values ​​we wrote above, %K means fast and %D means slower. These formulas produce buy-sell signals with the intersections that occur through the movements of prices.

There is another way to get strong signals other than intersections. This method is a way you can do by following technical incompatibilities. Investors who are knowledgeable about technical inconsistencies can better decide how to act in such situations. In other words, in order to be able to use the stochastic oscillator in the summary of the work, it is necessary to have a good grasp of the other subjects mentioned in the article.

Considerations in the Stochastic Oscillator

One of the biggest mistakes that novice investors or analysts who do not have a clear idea about analysis make when evaluating with the stochastic oscillator is to place a sell order immediately in regions where they detect a price increase in the indicator. With the decrease in prices, the oversold region is evaluated by the investors in the “sell” situation, because it is not easy to find buyers from this region, and this causes the selling price to retreat in panic.

The stochastic oscillator, which is used as a “speed indicator” in technical analysis, is very sensitive to sudden price changes, which causes prices to be seen constantly at the top of the chart while performing technical analysis. This is exactly where investors fall into error. Trying to find tops and bottoms combines with divergence in the oscillator and causes it to trade in the opposite direction.

As a result; The stochastic oscillator, which is used as a speedometer, is the most damaging when not used properly. Like every technical analysis tool, it is important to use this tool correctly. The fact that novice investors act with a few simple methods they have learned in the crypto money market without having certain knowledge causes them to lose their assets. Therefore, it is an important detail to learn the subject of technical analysis clearly and act accordingly.

Among the existing coins, also known as “cryptocurrency ” or “digital money” , the most used is Bitcoin. Bitcoin (BTC) is also the oldest introduced currency in the cryptocurrency market .   

There are multiple types of coins in the cryptocurrency market. These coins are analyzed in two parts. These;

  1. Fixed coins : ((TRUE USD), Gemini (GUSD), Tether (USDT) are the types of coins whose prices are equal to currencies such as dollars, euros and whose value does not change.)
  2. Variable Coins: Bitcoin, Ethereum, XRP and other coins. Their prices are constantly changing according to the volatility of the market.

What is a fixed coin?

Fixed coins are currencies that depend on the current value of physical currencies (Dollar, TL, Euro, etc.) used in daily life. It enables transfer transactions to be carried out quickly and easily in the investment market. The value of these coins remains constant while the transfers are maintained. That’s why it’s called a “stable coin”.

Digital currencies such as Bitcoin (BTC) and Ethereum (ETH) can gain or lose value in response to changes in physical currencies used in daily life. In stablecoins, unlike digital currencies such as Bitcoin (BTC) and Ethereum (ETH), their values ​​always remain the same. At the same time, stable coin prevents crypto users from encountering the difficulties posed by volatile coins.

What is a variable coin?

Cryptocurrencies have serious importance in the financial market. These currencies are very effective for investors to perform clearing and transfer transactions. However, some fluctuations may occur and their values ​​may change. For this reason, it is not considered right to wait in these coins before making a payment or switching to new investment. Because variable coins that lose or gain value can gain or lose depending on the direction of the market.

The 4 most preferred coins

Bitcoin (BTC)

Launched as the first cryptocurrency, Bitcoin (BTC) is one of the most used coins by investors due to its robust infrastructure. There is a fact that everyone knows, and this fact is that the cryptocurrency market would not have been so popular without Bitcoin (BTC). Thanks to the trust that Bitcoin has brought to investors, the crypto money market has developed and many new coins have emerged.

One of the biggest advantages of Bitcoin is that it is not difficult to find buyers when you are going to sell. Unlike many currencies, Bitcoin buys and sells transactions very quickly. You can do it on platforms like bitcoin profit.

Ethereum (ETH)

One of the most widely used coins in the cryptocurrency market is Ethereum, which was produced in 2015. The main purpose of this currency is to prevent the personal information of users from being stored by third parties and used for different purposes.

Unlike many coins, thanks to Ethereum (ETH), investors can keep their transactions in the investment market private. As a result of this situation, access to personal information of individuals becomes impossible.

Tether (USDT)

Tether (USDT) is one of the most well-known stablecoins in the cryptocurrency market. In fact, investors do not aim to make money with this coin, they use it to keep the money they earn at a constant value, that is, not to be affected positively or negatively by fluctuations in BTC, ETH or other cryptocurrencies. As we mentioned above, this cryptocurrency is a stable coin whose price is always equal to 1 dollar.

Ripple (XRP)

Another coin most preferred by cryptocurrency investors is Ripple. XRP Coin, which is a very reliable coin, offers its users the chance to make international transactions in banks.

Ripple (XRP) allows cryptocurrency users to perform transactions for a very low commission fee. Thanks to its transparency, Ripple has managed to become one of the most popular coins in the cryptocurrency market.

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