Charts and indicatorsUpdated 2 min readBy the FXNOD team
Stochastic oscillator explained, and how it differs from RSI
The stochastic oscillator shows where the latest close sits within the high-low range of recent periods, on a scale from 0 to 100. A reading of 90 means the close is near the top of that range. Above 80 is called overbought and below 20 oversold. It is fast and noisy, and suits ranging markets better than trends.
The formula
| Line | Formula |
|---|---|
| %K | 100 times (close minus lowest low of 14 periods) divided by (highest high minus lowest low of 14 periods) |
| %D | 3-period simple moving average of %K |
A slow version smooths %K once more before plotting it, which removes some of the noise.
How it is read
- Above 80: the close is in the top fifth of the recent range.
- Below 20: the close is in the bottom fifth.
- %K crossing %D: a short-term change in momentum.
- Leaving an extreme: many traders act when the line comes back below 80 or above 20, not when it first arrives.
Stochastic and RSI compared
| Stochastic | RSI | |
|---|---|---|
| Measures | Position of the close within the recent range | Size of recent gains against recent losses |
| Extreme levels | 80 and 20 | 70 and 30 |
| Speed | Faster, reaches extremes often | Slower, steadier |
| Best suited to | Ranges | Ranges, and judging trend strength |
Where it fails
In a strong trend the stochastic stays above 80 or below 20 for long stretches. Trading every overbought reading against an uptrend is the classic way to lose with it. Establish whether the market is trending before giving an extreme any weight.
Practical use
- Use it for timing inside a range or inside a pullback, in the direction of the larger trend.
- Prefer the slow version on short timeframes.
- Do not add it to a chart that already has RSI: they answer nearly the same question.
In FXNOD
Stochastic is one of the indicators available to a Bot Forge bot. Like any indicator, on a synthetic index it describes the recent range and predicts nothing.
Questions people ask
- Which is better, stochastic or RSI?
- Neither. Stochastic is faster and noisier, RSI steadier. They overlap heavily, so use one.
- What are the standard stochastic settings?
- 14 periods for %K and 3 for %D, with a further 3-period smoothing in the slow version.
- What does overbought mean on the stochastic?
- That the close is near the top of the recent range. It is a statement about position, not a forecast of a fall.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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