Stochastic Oscillator is a common leading technical indicator created by George Lane in the 1950´s. After more than 50 years from its foundation; this technical indicator had taken a place in the hall of fame of the Forex Technical Indicators. Here we present how to interpret it in an easy way and the philosophical concept behind this indicator.
The mathematical expression for this indicator is:
The result of this equation is a positive percentage between 0 and 100. If the closing price rises "too much" above the lowest price then the price is supposed to fall in the next period. If the closing price falls "too much" below the lowest price it is supposed to rise in the next period. You should ask about how to determine the "too much" level, some traders use the 20% and 80% as the minimum and the maximum levels. If the indicator is above 80% we say that the market is overbought and we should take a short position, if the indicator is below 20% we say that the market is oversold and we should take a long position. The MetaTrader 4 trading platform will show you this graphic and you could change these minimum and maximum levels.
Stochastic means that something depends of a determined probability, Forex Prices are Random Variables. This is the philosophicalsaid "There are no false or true statements, there are less or more probably stochastic events". We are not absolutely sure that if the stochastic indicator is above 80% the price will fall in the next period, but we know that is more probably that the price will fall in the next period. Remember that the next period in the MT4 platform could be a minute or a day or whatever you want.
What we want to show is that you should study and practice before beginning to invest in Forex.