Hi all,
Still in Pip school, but have come up with this question this morning. I’ve turned on this indicatior with default settings in MT4. There’s a solid aqua line and a broken red line. In the settings the aqua is ‘Main’ and the red is ‘Signal’ What is each doing? I’m really conscious of asking stupid questions, and if it is I’m sorry, but its early days and I’ve got lots of learning to do.
Thanks
J
The solid line on a stochastics chart is usually the main line or indicator or %K line. It has a longer time period than the other line. When someone says e.g. - the stochastic has become over-sold at 25, or over-bought at 83, this is the line they are getting that figure from.
The indicator or %D line is usually drawn as a broken line and has a shorter time period than the main line. It is smoother, less spikey. It is only used to identify the cross-over point when the main line crosses to above or below the indicator line.
From Sharescope -
"There have been a number of possible interpretations of how to use the Stochastic Oscillator, including:
That a ‘sell’ signal is generated when the two lines cross above the 75% mark, and a ‘buy’ signal is generated when the two lines cross below the 25%.
That a ‘buy’ signal is generated when either of the lines falls below a given mark (i.e. the 25% mark) and then rises above that same mark. For this method a ‘sell’ signal is then generated when either of the lines rises above a certain mark (i.e. the 75% mark) and then falls below that mark. This method works best in non-trending markets - also known as trading markets (see Vertical Horizontal Filter ).
That a ‘buy’ signal is generated when the %K line rises above the %D line, and then a ‘sell’ signal is generated when the %K line falls below the %D line.
In practice, care must be taken with this indicator as it tends to generate false buys and sells, and so should be used in conjunction with other indicators."
Thank you. Now I’ve confused myself even more! The timeframe I was looking at showed the lines crossing the 80 line, then I changed timeframe and it was nowhere near it - am I meant to use it in a certain timeframe? Probably a simple answer but I dont know.
Thanks
Changing the time-frame of the price chart will change the stochastic chart. e.g. moving from a daily chart to a 4-hourly chart.
Changing the periods of the two stochastic lines will also change the stochastic chart.
So, best to decide first and foremost what question you want stochastic to answer. Your question will come from your trading plan and should make it obvious which price chart time frame and which stochastic periods to use.
Unless you really have a significant need to use the stochastic oscillator to answer a question that otherwise stops you trading, I recommend don’t use it at all. Same for all other indicators. They have to earn their place in your plan. don’t use them just because they are there in MT4, it will only get too confusing.
Why would it be?
You can use a stochastic indicator in any time frame you want, if you find it helpful, but its lookback period is defined by numbers of bars on the chart to which it’s applied, so a 14-3-3 stochastic (for instance) will take its inputs from 14 bars (140 minutes) on a ten minute chart and from the same 14 bars (now 56 hours) on a four hour chart. Why should the output readings be similar?
Have you looked at the School pages here, and read a book or two, Jinkster? Nothing personal, but you don’t sound ready to be looking at indicators yet, without knowing how they’re constructed, what they’re measuring and why, and over how long a period, and what it signifies.
Why have you decided to use a stochastic, and what are you planning on it displaying for you?
I really think that at least for now, you probably shouldn’t be using it.
Thanks Charlie, I’m a newbie as you’ve probably guessed. Am following the school on here and got to the section on indicators, wanted to look at them on a demo that’s all, and came up with this questions.
Thanks
J