How to Determine the Correct Settings for Your Stochastic Oscillator

I will be honest with you. I am a fan of Stochastic Oscillator. Although there is one stream of traders who say that Stoch-Osc is an outdated indicator, I still think that this is an interesting indicator. What reasons underlie my interest? For me, Stoch-Osc is one of the best indicators that can predict when prices will stop (either for a moment or so).

Some of my trader-friends don’t believe. They say that Stoch-Osc often gives false signals. I say, yes you can or otherwise, BIG NO. It all depends on how you determine the correct settings for your Stoch-Osc.

The first thing to understand… Definition?? Hmmm… yeah…likely.

First of all, where does the name Stochastic come from? Stochastic means that comes from chance and probabilities. Well, the chance is not very inviting for who wants to invest in the currency market, right?

For those who have done little probes, stochastic it reminds of things. A stochastic oscillation is a representation of the random variable evolution over time.

A large part of theoretical finance applied to the modeling of financial products (derivatives or not) is based on the study of stochastic oscillation since mathematicians and financiers try to describe the evolution of currency prices by a random walk.

The basic concept, “slow down before changes”

Stochastic oscillation of momentum composed of two curves. An oscillator, as its name suggests, oscillates between two values ​​or around an axis. Our Stoch-Osc is bounded between 0 and 100. This means that it cannot exceed these values.

The momentum is by analogy with physics and mechanical inertia. When the price of action is moving, depending on the strength of the movement, it takes time for it to change.

Its inventor, George Lane (1921 – 2004) was a futures trader in Chicago. This indicator is sometimes called (though rare) Lane’s stochastic. George Lane had observed that a projectile shot in the air, before turning to fall, must first slow down.

The Stoch-Osc, therefore, helps the trader to determine when the momentum of the currency market price turns around and this makes it possible to anticipate the price reversal.

It identifies the possible reversals by analyzing the position of the fence in relation to the range of the session.

How to use Stoch-Osc? Over-bought / over-sold

Usually, we draw two horizontal lines on the Stoch-Osc :

  • a line at 80
  • a line at 20

When Stoch-Osc is above 80 the title is said to be overbought. This means that the bulls have been the winners for some time and that the value has benefited from an increase during the last sessions.

When the Stoch-Osc has a value lower than 20 it is said over-sold. The currency suffered a decline due to bearish activity.


Examples of Stoch-Osc  Uses

Example 1

On the graph above I represented signals generated by Stoch-Osc. These are classic signals.

On the left, a strong correction ends with a lateral drift. The Stoch-Osc makes the rase motte. In this case, we expect it to come out of the 25’s (or 20’s – I put the horizontal lines at 25, 50 and 75).

We then have a range of trading range after a small rally in which a sell signal could have been an opportunity to lighten the position. It’s hard to say whether to settle the position or not. The correction was weak and we went to a low level. An indicator like the S-Filter let us see the strength of the trend.

However, Stoch-Osc, which is rising just below 50 after the weak correction, may prompt us to return again.

The chartist analysis also indicates a broken triangle at the top (end of April).

The period of the trading range is a blessing for the trader.

On the right, I think there is a bullish setup. The last sell signal is a small correction and the resistance is broken. This is a triangle from which one comes out at the top.

As we can see, the use of Stoch-Osc s does not dispense with the use of chartism or other indicators. The most classic is to use the MACD with Stoch-Osc.


Example 2

In (1) we did a short sale. The courses go down. We can ignore the purchase signals of the Stoch-Osc because the corrections are very small, a sign of a good downward trend.

In (2) we have a trading range that starts with a lateral drift. There we can exploit the signals.

The range support is finally broken down and we have a new bearish rally in (3). Note that in (1) and (3) Stoch-Osc remains stuck under 20%.

In (4) we have a new range. The indicator, however, is struggling to pass above 80, limiting opportunities to make gains. We will be careful in these cases.

Nevertheless, the range takes place in a low zone (after a good correction), so we will favor the long positions (we have a kind of cup not very clean: the courts are preparing to go up).

And we will have been right to do it. The resistance is broken. A bullish rally is started in (5). We will ignore sales signals. If we want to take profits on a part of the position they will give us the opportunity.

At the end of (5) the upward support is broken. This is where you have to close the position and/or take a short position.


Note: we could have averaged downward on the green arrows. It’s dangerous, but it pays when we are SAFE that we are not in a downtrend on the higher UT. But, I repeat, it is a dangerous game reserved for the craziest or most seasoned.


The trick is that all positions close positively as soon as prices rise a little. This involves the centroid of positions.

Four Steps Closer to A Success in Trading World

If you want to be successful on the foreign exchanges, you need a plan. Best of course, one of the works. The most important requirements are discipline and a high degree of honesty. The aim should not be quick money, but a long-term increase in capital. If security is paramount then more than just good market analysis is needed. It requires a well-thought-out money management. This guidebook shows what investors need to pay particular attention to and how to achieve much better returns with simple means.

To correctly assess risks
Investors should not sit out all the ups and downs of a currency. A major slump can throw the entire portfolio off balance for years to come. Even if it comes in the following years to strong profits, such a price slide can not always compensate.
High losses should therefore be avoided in any case. After all, a pair that drops by 30 percent needs a 43 percent recovery to make up for the loss. High fluctuations therefore become very expensive for the investor. Here comes an old market wisdom to bear: losses must be stopped and profits will continue to run. This applies to every single item contained in the account.

Stop courses with technical tools set
In the case of graphs, stocks , indices , commodities, or currencies, investors often notice particular price levels. At this point, the course changes direction very often. If these areas are undercut, this makes the chart technician eavesdropping. Because in this area many stop courses were placed. Investors sell when the price falls below this mark.

Use trailing stops
The trailing stop is an automatic, permanently traded stop loss order , as it is now offered by most banks. As soon as the value of an index or share rises, the trailing stop is also adjusted upwards. If the desired object sinks, the trailing stop remains unchanged until the index has reached a new high. If the currency price falls below the set line, the securities are sold immediately. The investor does not have to worry about anything. Thus, trailing stops are an important tool in money management.

Be sure to reduce risks
As already mentioned, it is very difficult to compensate for strong price falls. Therefore, in the context of money management, strong loss-makers in the deposit should be avoided at all costs. First of all, however, investors should be aware of the losses they will be able to get over financially throughout the portfolio. Do I become nervous even at a minus of ten percent or can I also take a minus of between 15 and 20 percent.
It should be noted that not every investment behaves the same way. With regard to the price fluctuations, there are clear differences. Therefore, it makes no sense to apply the loss limit established for the entire portfolio to each individual investment. It is better if the risk appetite of the individual parts is represented by their volume.