Stochastic Oscillator Definition

A stochastic oscillator serves as an indicator that compares a closing price of a cryptocurrency to a broad range of the prices that it had over a particular period of time. This makes it a momentum indicator that is sensitive to market movements. Its sensitivity to the market movements can be changed by altering the time period or by getting a moving average of the outcome. Traders mostly use this momentum indicator to produce ‘oversold’ and ‘overbought’ trading signals.

The formula of the stochastic oscillator is:

%K=(C-L14/H14-L14) x 100

%K = the value of the Stochastic indicator

C = the most recent close price

H14 = the high of a 14-day period

L14 = the low of the 14 past trading sessions

The stochastic oscillator is always between 0 and 100, meaning that it is range-bound. Because of this, the stochastic oscillator serves as a very useful indicator of ‘overbought’ and ‘oversold’ circumstances. Basically, traders use this indicator to determine whether a cryptocurrency is being overbought or oversold; in return, they use this information to time their trades.

Why is the Stochastic Oscillator Important?

In normal conditions, when this indicator is above 80 it means that the cryptocurrency is being overbought. On the other hand, when the indicator is under 20, that cryptocurrency is considered oversold. Being overbought means that the cryptocurrency is in a bullish trend while being oversold means that the cryptocurrency is in a bearish trend.

This indicator often consists of two lines: one being the value of the oscillator, and the other being its three-day simple moving average (MA).

Also Read: What Are Fibonacci Retracements & Fibonacci Ratios?

Takeaways

  • The stochastic oscillator is an indicator that serves to indicate whether a cryptocurrency is being overbought or oversold. It was developed in the 1950s by a person known as George Lane.
  • The stochastic oscillator cannot be higher than 100 or lower than 0.
  • When a cryptocurrency is overbought it means that its market is bullish. When it is oversold it means that its market is bearish.

 

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