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[UPDATE] Metatrader 4 Tip 2 – How to use the Forex Stochastic Oscillator

We already showed you How to Add an Indicator to a Graph on Metatrader 4.  Today, we will shift our focus to the actual USE of a Forex Indicator by taking a deep look at the Stochastic-Oscillator indicator on MT4.

The Stochastic-Oscillator is a momentum indicator used for technical analysis. The term stochastic refers to the point of a current price in relation to its price range over a period of time. The stochastic oscillator displays the regularity in which the price closes near its current high or low by contrasting the current price to the range over time.

The Stochastic-Oscillator is range-bound, meaning it is always between 0 and 100. This makes it useful as it indicates signs of overbought and oversold conditions. The Stochastic Oscillator will always fluctuate within this range. Traditional settings use ’80’ as the overbought threshold and ’20’ as the oversold threshold. 

To start using the Stochastic-Oscillator we open Metatrader and look to the Navigator window on the left part of the screen. If you do not see the navigator window, remember you can bring it up by pressing Ctrl+N

Stochastic Oscillator oindicator on metatrader 4

Once you have located the navigator, look for the Indicators > Oscillators and then look for the Stochastic-Oscillator

Setting up Stochastic Oscillator indicator on metatrader

Once you find it open it.

Setting up Stochastic Oscillator indicator on metatrader

Then, set up the parameters you wish to use

Setting up Stochastic Oscillator indicator on metatrader

There are different versions of the Stochastic Oscillators but we’ll just focus on the two main ones. The Fast Stochastic Oscillator, which is based on George Lane’s original formulas for %K and %D, and the Slow Stochastic Oscillator which smooths %K with a 3-day SMA.

We recommend you leave the predetermined parameters, however you can always try a more personalized approach with a demo account to see how it works for you.

Examples

On the following graph we will show you two examples where the Stochatic-Oscillator reached the over bought and over sold conditions in less that 24 hours.

Stochastic Oscillator example

When the Stochastic indicator is between the levels of 75 to 1 (as is shown for January 26 at 22:00). In this case we say that the pair is Over Bought and we will look for short positions.

On the other hand when the Forex Stochastic is below the levels of 0 to 25, as demonstrated on January 27 at 04:30. We say that the pair is in an Over Sold condition and we will look for long positions.

It’s always important to confirm the given signal by the Forex Stochastic Indicator with other indicators like, for instance, with a 5-period MA

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