How to Read Stochastic Indicator in Crypto Trading,,

How to Read Stochastic Indicator in Crypto Trading

How to Read Stochastic Indicator in Crypto Trading

The stochastic indicator is one of the leading indicators used by traders to analyze the stock market, forex, and crypto. In this article, we will discuss in full the definition and how to read the stochastic indicator.

Also read: What are the 9 Differences in Stocks and Crypto in the Investment World?

What is the Stochastic Oscillator Indicator?

The stochastic oscillator is a leading indicator used by traders to analyze market conditions and crypto price trends. As a momentum indicator, the stochastic oscillator works by comparing the closing price levels of an asset within a certain price range over a certain period.

The stochastic oscillator was developed by George Lane in the late 1950s. According to Adam Hayes of Investopedia, stochastic indicators were originally used to analyze the speed and momentum of prices over a certain period, usually 14 days.

Stochastic Indicator Functions in Trading

Sebastian Sinclair from Coindesk calls the stochastic oscillator a very useful indicator. Some of the functions of the Stochastic indicator are as follows.

Determine oversold, overbought, bullish, and bearish divergence conditions

Tells the trader the right time to open or close a position.

Can work well for dynamic and volatile crypto market analysis

Serves as a leading indicator that precedes the price

How to Set Stochastic?

Adam Hayes from Investopedia explained that the stochastic oscillator will show a graph consisting of two lines.

The first line (%K) reflects the actual value of the oscillator for each session.

The second line (%D) represents the three-period average of price movements.

Meanwhile, Alan Farley, a contributor to The Street in the field of trading and technical analysis, revealed that different time-variable settings will show different stochastic charts. In general, there are 3 types of time-variable settings, namely:

Setting the time variable for the short term (5,3,3) will result in a responsive chart showing multiple buys and sell signals.

The mid-range setup (21,7,7) results in a broad price swing with a smaller number of buy and sell signals.

Meanwhile, buy and sell signals in the long-term setting (21,14,14) rarely change.

Reporting from the Coinmarketcap page, the ideal time-variable setting for the stochastic oscillator is 14.3,3. The %K length value is set for 14 days, while the %K smoothing and %D smoothing periods are set for 3 days.

After knowing how to set the Stochastic, traders also need to know how to read the Stochastic indicator.

How to Read the Stochastic Indicator

A stochastic oscillator is a technical indicator that has a value range of 1-100. According to Hayes (2021) and Sebastian Sinclair (2018), reading the stochastic indicator is also very easy and can be used to identify the following conditions.

Overbought and Oversold

A reading above 80 indicates overbought conditions. Meanwhile, a reading below 20 signals oversold conditions.

Buy Signals and Sell Signals

The intersection of the %D and %K lines in the lower oversold area indicates a possible price reversal in the direction of the uptrend and can be interpreted as a buy signal.

On the other hand, the crossing of the %K and %D lines in the overbought upper region indicates a possible price reversal in the direction of the downtrend and indicates a sell signal.

Note: the area with the red arrow is a sell signal, while the area with the green arrow is a buy signal.

Bullish and Bearish Divergence

The CMC Markets team reveals that stochastic divergences can be used to predict trend reversals. A bullish divergence occurs when the stochastic indicator shows a lower that is higher than a new low in the market, which indicates an impending price reversal to bullish.

On the other hand, a bearish divergence occurs when the price in the market reaches a new high while the stochastic indicator reaches a lower high. This condition indicates that the upward momentum in asset prices has slowed and signals a price reversal to be bearish.

Note: The blue arrows indicate a bullish divergence, while the red arrows indicate a bearish divergence.

However, Hayes cautions that using the stochastic indicator does not always provide accurate price reversal predictions. In this case, the Stochastic oscillator can also generate false signals, in which the trading signals shown by the stochastic oscillator are different from the price trend in the market.

Therefore, traders are advised to always check the stochastic oscillator chart changes to confirm clues about future trend changes. Traders can also use price trends in the market as a filter. When the stochastic indicator signal is the same as the trend in the market, traders can use the signal.

This is information about understanding and how to read the stochastic indicator in the trading world. For those of you who want to invest or trade crypto assets easily, download Pintu, an Indonesian cryptocurrency application that has been officially registered with CoFTRA.

At Pintu, buying and selling various crypto assets can start from as little as IDR 11,000, you know!

Reference:

CMC Markets Stochastic indicator. Retrieved date: 28-11-2021.

Coinmarketcap, Stochastic Oscillator. Retrieved date: 28-11-2021.

Investopedia, Stochastic Oscillator. Retrieved date: 28-11-2021.