Lesson 4: Stochastic Oscillator

Stochastic Oscillator Basics

  • The Stochastic Oscillator consists of two lines - when both lines are included on a price chart, it is referred to as the Full Stochastic. The two lines are:
    1. %K - tracks the current market rate for the currency pair

    2. %D - "smoothes out" the %K line by calculating and plotting the exchange rate as a moving average - this is also known as the signal line

  • Trading platforms perform the calculation based on this formula:
%K = 100 x (Closing Price - Lowest Price of N Periods)
(Highest Price of N Periods - Lowest Price of N Periods)
  • Note that N is usually is set to 14 periods as this represents a large enough sample of data to arrive at a meaningful calculation.
  • Most systems allow you to modify the number of reporting periods but by doing this, you could alter the effectiveness of the results.
%D = 3 – Period Moving Average of %K
  • The calculation to create the %D Stochastic uses the last three valuations of %K to create a three-period moving average of the %K Stochastic. The result is a "smoothed-out" version of %K.
  • Because %D is a moving average of %K, it is referred to as "Stochastic Slow" as it reacts more slowly to market price changes than %K. As you would expect, %K is also known as "Stochastic Fast".

Stochastic Oscillator over High-Low-Close Bar Chart
Stochastic Oscillator placed over High-Low-Close Bar Chart

This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

Trading FX and/or CFDs on margin is high risk and not suitable for everyone. Losses can exceed investment.