Beginners Guide to Crypto Trading

An interesting fact about oscillators as technical indicators is that we have not yet fully unleashed their full potential. One of the most prominent oscillators in this regard is the Stochastic Oscillator (STOCH). This indicator has layers of complexity waiting to be explored, making it a valuable tool for technical analysis. Becoming proficient in using this indicator can give you a significant advantage over others in the field, giving you a strong skill set. Let’s learn the Stochastic Oscillator to acquire one of the most valuable analytical skills you can possess to excel in this sector.

1. Stochastic oscillator: What you need to know

Similar to RSI, the Stochastic Oscillator is a momentum indicator. This indicator, which was developed in the 1950s by Dr. George Lane was developed, shows a cryptocurrency’s closing price relative to its high and low prices over a selected ‘Look Back’ period, typically 14 days.

It is useful for deciding the right time to enter or exit the market as it can analyze situations where crypto pots are either overbought or oversold.

A stochastic oscillator draws two lines: %K and %D. The line %D now follows the line %K. And, they often intercept.

Let’s try to learn the concepts behind these two plot lines in a simple way.

1.1. What does %K represent in STOCH

%K shows whether the current price of a cryptocurrency is closer to recent highs or lows over a specific time period.

1.2. What does %D represent in STOCH

%D involves taking the average of %K values ​​over a specified period, often 3 periods. This reflects a smoother representation of price movement.

1.2.1. Importance of smoothing in stochastic oscillator

Smoothing is generally used to reduce price fluctuations for better trend analysis. Similar to how we use %D for a smoother %K, we can make %K even smoother. If we select a 14-period and set %K smoothing to 3, it takes an average of the %K value of the last three consecutive 14-period time frames. The resulting %D, based on this smoothed %K, is a more refined and smoother indicator.

Your understanding of the concepts can be expanded if you have good clarity about the calculations made with these concepts.

2. Learn how to calculate STOCH

If you have understood the concept part, you may not have any problem in understanding this calculation part. For %K and %D we have two different formulas.

Let’s explore one by one.

Let’s understand what each of them represents.

C = Current closing price

Ln = Low in the selected ‘Look Back’ period

Hn= High in the selected ‘Lookback’ period

Time to explore the practical side of this indicator. You can choose TradingView for this purpose.

3. How to start Stochastic Oscillator in TradingView

Applying a Stochastic Oscillator within a TradingView chart is a simple four-step process.

Step 1: Log in to TradingView

Log in to your TradingView account or create one if you don’t have one.

Step 2: Choose a Crypto Chart

Use the search option to select a crypto chart.

Step 3: Launch Stochastic indicator

Click on the ‘Indicators’ button, located in the top bar, search for ‘Stochastic Oscillator’ and select it.

In the Stochastic settings, adjust ‘%K Length’, ‘%K Smoothing’ and ‘%D Smoothing’ to your preference.

3.1. Setting inputs for Stochastic Oscillator: What you need to know

Setting the inputs in the Stochastic Oscillator correctly is essential for the indicator to work the way you want it to. To do this, you need to have a clear understanding of each element in the input section. Primarily there are three important ones: %K Length, %K Smoothing and %D Smoothing.

%K Length:– This is the number of days considered for %K calculation. A higher number makes the indicator smoother, while a lower one makes it more responsive. %K Smoothing:- It improves %K’s readability. By means of a moving average, it calculates the average of recent ‘% K values. Unlike ‘%D’, it uses ‘%K’ values ​​from the selected period and the corresponding ‘%K’ values ​​from the preceding periods of the same length. %D Iron:- %D further smoothes %K. It is calculated as a moving average of %K.

3.1.1. What is the best setting for a stochastic oscillator

The best Stochastic Oscillator settings depend solely on the asset and trading strategy. The default values ​​are 14 for %K Length, 1 for %K Smoothing, and 3 for %D Smoothing. You can experiment with these input elements to find the right fit.

For the learning purpose, you can now open the Bitcoin/TetherUS daily chart. Run the indicator and keep the default input settings as they are.

Once you press the ok button, you will see an oscillator, ranging between 0 and 100, with two lines, %K and %D.

4. Ways to Use Stochastic Oscillator in Crypto Trading

Stochastic oscillator mainly serves three key purposes

Overbought / Oversold Signals:- When Stochastic Oscillator moves to the overbought region, it indicates a market top. Conversely, entering the oversold region indicates a potential market bottom. Crossings as signals:- The %K line crossing below the %D line is a sell signal, indicating a weakening momentum. Conversely, the %K line crossing above the %D line can be a buy signal, indicating potential strength. Divergence:- Divergence occurs when the Stochastic Oscillator disagrees with price trends. For example, if prices make higher highs while the oscillator does not, this may indicate a potential trend reversal.

End note

Finally, Stochastic Oscillator is a very useful technical indicator used in cryptocurrency trading. It helps traders identify overbought and oversold conditions, provides signals through crossings of %K and %D lines, and detects potential trend reversals through divergence. Understanding its calculations and settings can give you a valuable edge in analyzing cryptocurrency markets. Keep one thing in mind that the best settings for Stochastic Oscillator may differ depending on the asset and trading strategy. What this highlights is the importance of experimentation to maximize the effectiveness of this indicator.