How Stochastic Oscillator Indicator works
The Stochastic oscillator uses time periods to calculate the fast and slow lines. The number of periods used to calculate the %K and %D line depends on what purpose a Forex trader is using the indicator for.
- A trader using the oscillator in combination with a trend indicator to see overbought and oversold levels, one can use periods 10 periods.
- The default period used by stochastic oscillator is 12.
Traders should not use stochastic indicator alone for trading decisions, but should use it in combination with other technical indicators. In ranging markets this indicator can be used to show oversold/overbought levels as potential profit taking points.
Oversold and overbought levels by default are 20 and 80, but other traders use 30 and 70.
To look for "overbought" region at the indicator's 80% mark is used
To look for "oversold" region 20% mark is use.
The overbought and oversold levels are displayed as dotted horizontal lines on the indicator. These levels can also be adjusted to the 30 and 70 levels.
Overbought and Oversold Levels