The Stochastic Oscillator is used to indicates oversold and overbought conditions along with the accompaniment of other clues. Here is a picture of the Stochastic Divergence indicator for MT4. The download for this indicator is at the bottom of the article.
I use the stochastic indicators to evaluate overbought and oversold areas particularly in the direction of the trend and at reversal points. In conjunction with resistance/support areas and other confluence factors, the overbought/oversold regions allow the trader to enter into a trend or reversal at the best price possible. The oscillator follows the speed or momentum of the price and not the price directly.
The Stochastic ranges between 0 to 100 with 20 and 80 being the oversold and overbought areas respectively. If we were to buy it would be best when the indicator is below or approaching the 20 region and if we were to sell it would be best to sell when it’s approaching or above the 80 region.
The following is a picture of the USD/JPY pair and its upward climb. Note the areas of oversold as good regions to enter the trade as a buy. This trade entry direction was based on the post-election surge in risk on sentiment with large amounts flowing into the USD.
This risk on sentiment resulted from a realization at the time of Trump’s plan to invest in
US infrastructure which the markets concluded would result in inflation and the FED raising their rates.
The red arrows indicate the buy points where one could enter given the extreme bullishness for the reasons just mentioned. I made money off of this but unfortunately didn’t plan a proper exit. I could have made substantially more if I understood the effect of news in the long term . Lesson learned.
Fundamentals and Sentiment should be used to help plan both entries and exits along with oversold and overbought conditions. In addition to overbought and oversold conditions, we will add the condition of regular and hidden stochastic divergence for MT4 trading platforms.
Again, a typical entry is based on a confluence of factors, most importantly the underlying sentiment mentioned above. Along with the sentiment, the other factors typically needed for confluence are support/resistance, the direction of moving averages, bouncing off of moving averages, certain candlestick patterns, etc.
Stochastics are only useful when taken as adding certainty to trade along with the other confluence factors mentioned above. Even more powerful are the two types of stochastic divergences mentioned below in combination with the other confluence factors for a trend continuation or reversal.
Regular Divergence will be used for trend reversal and Hidden Divergence will be used for trend continuation. In addition to entering a trade, Stochastic Divergence on MT4 indicators can be used for exiting a trade. How long should one stay in the trade? If it’s a strong sentiment like the one mentioned above, then as long as it’s still in the news. In regards to the chart above, news articles were mentioning this sentiment trend for days after the election.
The indicator could be used in conjunction with the news to arrive at a realistic exit. An overbought condition or regular divergence may be valid for an exit for a long trade or not depending on how strong the news is that causes a price movement in the first place.
I use the 5, 3, 3 exponential settings for the Stochastic Divergence Indicator for MT4 in the following examples. The indicator will be downloadable below. I'll try to find an MT5 indicator written in MQL5 for download, but the same parameters work in all cases.
A regular divergence is used as a possible sign for a trend reversal. I use it as trend continuation as well. If the price is making lower lows but the oscillator is making higher lows, this is called regular bullish divergence. After forming a second bottom, if the oscillator fails to make a new low, it is likely that the price will rise, as price and momentum are normally expected to move in line with each other.
If the price is making a higher high but the oscillator is a lower high, then it’s referred to as regular bearish divergence. After price makes that second high, if the stochastic divergence indicator for MT4 makes a lower high, then the price may reverse and drop.
Hidden divergence is used as a possible sign for a trend continuation. If the price is in a general uptrend and the price is making higher lows but the oscillator is making lower lows, this is called hidden bullish divergence. After forming a second bottom, if the oscillator make a new low, it is likely that the price will continue to rise, as price and momentum are normally expected to move in line with each other
If the price is in a general downtrend and the price is making a lower high but the oscillator is a higher high, then it’s referred to as hidden bearish divergence. After price makes that second high, if the oscillator makes a higher high, then the price may reverse and drop.
Installing the Stochastic Divergence Indicator for MT4
Download the Stochastic Divergence indicator after signing up below
Copy the file to the Metatrader Directory / experts / indicators /
Restart Metatrader 4 and create a new chart
Find the Custom Indicators file in the Navigator button and right click on the Stochastic divergence indicator label
I would not use this indicator alone for entry of a trade. As mentioned above, use it in conjunction with other characteristics: price action, candlesticks, resistance/support, and even other indicators such as an RSI Divergence indicator. Experiment, but don't do so without the incorporation of long/short term fundamental analysis or volume analysis. Technical signals alone are not sufficient to make profits in the long run.
STOCHASTIC DIVERGENCE INDICATOR for MT4 DOWNLOAD IS BELOW
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