A stochastic oscillator shows you how well the market trend is in force by looking at particular time period and comparing the present price to its selected period highs. We look at the BTC-EUR price in this guide. The extra line plotted can give signals as to buy and sell by indicating if the market is losing the strength of its upward trend or conversely a point to exit you position.
What is the Stochastic Oscillator?
A stochastic oscillator is based on the idea that in an upward trending market prices will close near their high and in a bear market prices will close near their low. A stochastic oscillator will show oversold when it is below 20 and overbought when it is above 80. The sensitivity of the indicator to market movements can be adjusted by lengthening its time period or by taking a moving average of its result similar to the MACD - where this can again act as a change in momentum on cross over points.
How do Stochastic Oscillator's work?
The Stochastic oscillator works by taking the most recent close and subtracting the low of the previous 14 day trading sessions - then dividing this by the highest price of the last fourteen trading periods minutes the low of the previous fourteen periods. This is all multiplied by 100 to normalise the figure. Again changing the period and making it higher or lower will make the stochastic oscillator more sensitive to market movements.The signal line is just a moving average of the stochastic oscillator.
Example Chart Stochastic Oscillator and Analysis
If you at the EUR-BTC price chart above you can see the stochastic oscillator showing a sell signal in the first index as the stochastic line moves over the 80 mark and crosses its Moving average from above. The second signal circled in green shows the opposite and is an indicator to buy the market.
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