The stochastic oscillator, introduced by George Lane, is based on the idea that when an asset or in our particular case, a pair is in an uptrend, prices usually tend to approach session highs and when the trend is down, prices will tend to approach session lows.
The oscillator consists of two lines called% K and% D. The% K line trying to find a relationship between high, low and closing prices. The% D line calculates the simple moving average K% through periods N, and the idea is to show us when a couple of oversold or overbought. Both lines move between 0 / 100 range, which means it is a useful indicator to identify the cycles.
The problem here is that when the market is a definite trend, the signs are generally false as the oscillator tends to saturate at the ends and is unable to follow the price action.
This oscillator produces many crosses, sometimes quite violent, and that is why the modified version is very useful, formed by the same line, but changing the number of periods involved, to filter out false signals. We combine a slow, 03/07/14, with a faster time to change the defaults to 5-3-3 (8-5-3 is another variant).
Both Stochastic filter together, giving more accurate entry points, once again enter any of the extremes. As a comment on the likelihood of seeing the indicator is saturated at its ends, it is worthwhile to set input levels at 20 and 80, instead of 30 or 70. With this combination, the faster we will give the first warning of a possible trend change that will then be confirmed by the fastest. Follow the set up and tested it: it is very useful for almost any pair, the letters of four hours or even smaller installments.
