✔️ Information reviewed and updated in April 2024 by Eduardo López
In order to develop a strategy within trading, it is extremely important to know how to identify when the price trend of an asset (bullish or bearish) begins to run out. When you can identify that moment, you will be in the optimal conditions to execute orders related to the market and be able to take better advantage of the full extent of the next price movement.
Knowing how to identify each of these situations is usually a bit complex, especially if the market is characterized by a behavior without a predominant trend, that is, a lateral behavior. To be able to identify them, we need indicators called oscillators, so today we will learn about the stochastic indicator and its importance in changing trends.
➡✨What is the stochastic lines indicator?
The indicator is a type of oscillator that is usually used for technical analysis whose objective is to evaluate the momentum or momentum of the price of a financial asset. This concept was introduced in the 50s by the trader and analyst George Lane and the key to this indicator is that before a transformation is generated in a price trend, it is also responsible for producing signals of exhaustion and loss of momentum. from the previous trend.
In order to identify these signals, the indicator is in charge of comparing the closing prices of an asset with the price range in which the price has moved in a certain number of sessions. The stochastic indicator arises from the premise that when an asset is in an uptrend, the closing price usually tries to approach the maximum prices of each session.
So when an asset is in a downtrend, the closing price will try to approach the maximum prices of each session.
➡✨How is the stochastic lines indicator represented?
The indicator is represented by two lines whose value varies between 0 and 100. And these two lines are usually called% K and% D, the first is represented in blue, while the second in orange. To obtain its values you need to use the following formulas:
% K = 100 x ((C - Min) / (Max - Min))
% D = Simple moving average of n periods of% K
Where:
C: Closing price of the last session.
Min: Minimum price reached during a number of assigned sessions.
Max: Maximum price reached during a certain number of sessions.
It is important that you consider that a stochastic with higher parameters will give fewer signals, which will be more reliable than if you had lower parameters. Therefore, the configuration of the stochastic parameters will depend on the trading style of each operator.
➡✨ Why should you implement it?
It is one of the most important indicators within the family of oscillators, so It is characterized by a very receptive and volatile momentum reading, which indicates an asset for many trading strategies. Don't forget that oscillators tend to perform best during range periods, especially at supports and resistances to identify a price reversal.
