Stochastic divergence indicator mt4 … If you are very familiar with the forex market, you will agree with us that there are so many technical indicators at the disposal of traders. Traders use these indicators to determine whether to buy/sell to make a profit. One standard indicator that you may have heard of is the Stochastic Oscillator.
There are several trading methods involving the use of Stochastic Oscillator, one of which is to spot divergences. Expert traders use this indicator to spot divergences by setting up an alert system to enable them to detect potential trend reversals and also reveal underlying weakness or strength that may not be captured on a price chart.
If you are new to the forex market and you want to start using this lovely indicator. You would obviously need a Stochastic divergence indicator MT4. Read on to find out what it is and how it is made up of so that when you start using it, you will understand how it works.
Without further ado, let’s delve into Stochastic divergence indicator MT4 and how it works. Later in the article, we will also talk about other Stochastic strategies such as cross-over and overbought/oversold.
What Is Stochastic Oscillator
The stochastic oscillator is a simple concept. It moves or oscillates between 0 and 100. This movement shows asset prices in relation to a given time. At any point, the indicator shows 0, it means the asset price is very close to the low of the time frame. Similarly, if the indicator is close to 100, it means the asset price is very high at that particular time.
The stochastic oscillator can be customized and has three different variables from which to choose. The image below shows what you can expect when you add the indicator to your price chart.
From the above image, %K is the number of times you intend to use the calculation. For instance, if you plan to trade with a one minute chart, it is advisable to set the indicator to 5 or 7. This means the sign will move between the last 5 or 7 minutes, respectively. In the image above, the indicator was kept at 5.
The term ‘slowing’, as seen on the indicator, is used to smoothen %K’s fluctuations. If you set the “slowing” to 1, the %K line would be seen moving back and forth rapidly. Conversely, if you set it to a higher number, say 3, the rate of movement of %K line would be slower. Your trading experience will influence which one to choose.
Also, %D period is the average of %K. It is also used to smoothen %K’s line slightly. Generally, %D is usually shown as a dotted line. From the image above, you can see that both %D and %K were kept at 3.
Furthermore, the “price” field allows you to choose the asset price to use during the calculation. From the image above, you can see that High/Low was selected to capture the different price data in the bar. If you are not comfortable with high/low, you can alternatively choose to use the closing price.
Finally, you will then choose which moving average is suitable for your trade. There are different moving averages to leverage, including smoothed or weighted and exponential moving averages. Some knowledge of these moving averages will help to determine which to use.
The image below shows a EUR/USD Stochastic using the information above.
As soon as you set up stochastic, you can then start looking out for divergence. Divergence can be said to have occurred when the asset price doesn’t move in line with the indicator. For example, the asset price moves to a high position, but the stochastic fails to reach that level. Or the asset price moves to a new low, but the stochastic moves in the opposite direction.
You should brace up for a potential price change the moment you observe a divergence. Do not just trade on divergence because it takes some time for a reversal to occur after a divergence. We suggest you wait for the price to break lower before you trade. The image below shows a situation where the asset price makes a new high while the stochastic moves in the opposite direction.
Divergence is an effective strategy for a successful trade even though it’s not a timing indicator. Another effective strategy you can use alongside with stochastic is to look for overbought or oversold conditions. While below 20 is called oversold, above 80 is known as overbought.
The general rule is that you buy when the price is below 20 and sell when the price rises above 80.
Cross-over trading is the final strategy for stochastic. You can use cross-overs alongside with divergence or on its own. In this strategy, the right time to buy is when the %K line is above the %D line. Also, the right time to sell is when the %K line is below the %D line.
Final Words Stochastic divergence indicator mt4
And that would be it! Stochastic divergence indicator MT4 has three major trading strategies for forex traders to leverage. Each of these strategies can be used jointly or individually, depending on the market situation. Whenever you intend using a divergence, ensure you put an additional method in place to signal you the right time to trade. Otherwise, your trading efforts might be futile.
Divergence is very simple to use, but it requires patience for the asset price to reach the point or value you are looking for. Plus, Stochastic is highly customizable. The beauty of the tool is that you do not need to rack your brain trying to fathom what works while trying to place a trade; the indicator keeps watch for you and tells you when to go for the kill.