Stochastic
Oscillator consists of two lines called %K and %D. The core of this indicator
is %K, while %D is the Simple
Moving Average (SMA) of %K. It could be said that %D is the line
identifying the direction of %K.

If
we look at the Stochastic Oscillator range i.e. 0 – 100, it can be said that
this indicator actually does not vary with the Relative
Strength Index (RSI). The difference is, in Stochastic Oscillator the
calculation includes lowest prices, highest prices, and closing price, at the
appointed time.

Well,
let's look at the picture below.

The
above picture is Stochastic Oscillator for GBPUSD with the daily candle
periods. It appears that %K tends to be more ‘kinky’ than %D which is smoother
than %K curves. One characteristic of these indicators is the movement that is
always in 0 – 100 ranges. Additionally, the later you will learn that the
Stochastic Oscillator has many variants such as fast and slow.

Now,
how this indicator uses? Do the same with RSI? If the same why not simply use
RSI? Well, this question is what we will answer this time.

Views
of its kind, Stochastic is indeed the same as RSI, it is an indicator of
Oscillator types. Usually, the usefulness of this indicator types is indeed to
accommodate the movement of buying saturated and selling saturated of currency
movements. But there are some things that are not owned by RSI but owned by
Stochastic, and likewise vice-versa.

Review
to its sensitivity, RSI is far more sensitive than Stochastic. So is ease in
reading. RSI has no smoother line %D as on Stochastic. Thus, it can eliminate
the bias effects on the reading.

However,
the simplicity of RSI can also be a weakness. RSI is less suitable if it uses
to know the ongoing trend on the currency. While the combined %K and %D on
Stochastic can be a pretty powerful duet in predicting the ongoing trend.

The
other thing, Stochastic is not too sensitive as RSI, then the false signal was
not so often as on RSI. This is why most traders prefer Stochastic in knowing
the saturated buying and selling.

There
is some information that we can get with Stochastic Oscillator. But in general,
it is no different with information on RSI and SMA. Indeed, Stochastic
Oscillator is actually a combination of both types of these indicators, by
means of different calculations. Overall, we can use these indicators to
determine overbought/oversold state (meaning the prediction of the trend for
the long term), the intersection between %K and %D (as a short term trend), and
Bullish/Bearish centerline.

**Overbought/Oversold**

The
overbought
or oversold conditions according to Stochastic Oscillator retrieved when
the %K line has entered 20 and 80 restrictions, i.e. under 20 for oversold, and
above 80 for overbought. Same with RSI, isn't it? Please keep in mind, the
limitation of 20/80 is not absolute limits. It could be 30/70 or the other. So
do not be surprised if I also use a different limitation in determining
conditions of overbought/oversold from this situation.

This
overbought/oversold conditions will trigger the prices rising and declining in
the long term. If the price is increasing but the stochastic is already heading
towards its overbought points and started to leave the area, that means will
occur a pressure to the price increase rates which ultimately make prices to
fall back to its new balance. Look at the following picture. We
use 20/80 overbought/oversold restrictions for this time.

On
the picture above, it seems when the prices come into the overbought or
oversold area then it will slowly move back down along with the direction of
movement of the Stochastic. How many times the Stochastic showed remarkable
accuracy in knowing the direction of the next movement (marked with a red
circle). By obeying Stochastic alone, it can be seen how big the profit that
could be produced within a few days of the movement.

**%K and %D Crossing**

In
addition to the 20/80 area as in the above example, the intersection of %K and
% D also can be used to determine the Buy/Sell positions. Occasionally, we run
out the patience for waiting for the Stochastic limit to touching 20/80 as we
have specified. Although often accurate, not necessarily in the wave motion
when Stochastic moving down then he got around to entering the 20 areas, and
likewise when it rises. Sometimes, before it got past the area, prices have
again moved towards the reverse, so we missed the chance. Well, we can use
crossing like Stochastic to determine the Buy/Sell in this conditions.

Just
as Moving Average indicator that used by looking at the crossing at two
different periods, the same thing also can be applied to Stochastic. The
difference here is the crossing that happened was between %K and %D which is
smoother for %K.

As
we know previously, the %D is the Moving Average (MA) for %K which is nothing
but a reflection of the price change. So, in keeping with the nature of MA in
determining the trend changes, every intersection between %D and %K, means is a
change in the trend for a brief period to the next. A bullish condition occurs
when a %K line crossing %D from below, and otherwise, bearish trend occurs when
%K crossing from the top. This situation can take place even when the two lines
are in the overbought/oversold areas. If this happens, it means that the
pressure to buy or sell are very strong, so likely the prices will break
through the boundaries of its support and resistance. Consider the following
image:

Note
When %K and %D intersecting each other, and begin to move to the top (marked in
yellow) prices also showed an uptrend and keep moving up. Conversely, when the
prices move down then the %K and %D also mutually intersect and heading to the
bottom. This both conditions is constantly repeated.
How to read it is exactly as we interpret the Moving Average indicator.

Well,
until here the topics about Stochastic Oscillator. Before we studying about
other indicators, I need to remind again about Stochastic Oscillator indicator
characters. The advantages and disadvantages of indicators that move in a
specified range are its sensitivity Permalink . So also in the Stochastic can be very
sensitive when we using it in a period that not appropriate.

Using
this indicator with an inappropriate period can take us to the wrong
decision-making and ultimately leads us to the great loss in forex trading.
Therefore, it is highly recommended that you seek the best periods on these
indicators for each of the pairs. The values can be varied. The longest the
periods used then the indicator will be more smooth, which means its
sensitivity will be reduced. It is also advisable to use Full Stochastic in
usage because it is more delicate and can reduce the indicator charts that is too curly.