3 Stochastic Oscillators to Track Momentum

Stochastic Oscillator

In the late 1950’s, George Lane, a trader and technical analyst from Chicago, developed the Stochastic Oscillator. To this day, traders and investors of all levels use the Stochastic Oscillator to track market momentum. NinjaTrader comes with 3 unique Stochastic Oscillator indicators:

  • Standard Stochastic Oscillator
  • Stochastics Fast
  • Stochastic RSI

Learn how traders read the 3 Stochastic Oscillators in this 3-minute video!

You can add any of the Stochastic Oscillators to your NinjaTrader chart by:

  1. Right-clicking and selecting “Indicators”.
  2. Locate Stochastics, Stochastics Fast, or Stoch RSI from the top left list, and click add.
  3. Configure the right-side parameters for the indicator and click OK.

Stochastic Oscillator Plots

Two lines make up the Stochastic Oscillator. The %K line is the primary calculation. The secondary line is the %D line, which is a moving average of %K. These plots represent the location of the closing price of a market with the high and low prices over a user-defined timeframe. In fact, the term “stochastic” refers to the current price in relation to its historical range.

Stochastic Oscillator

Using Stochastics in Trading

While the Stochastic Oscillator can be used similar to other momentum oscillators, such as the Relative Strength Index (RSI) to identify overbought and oversold markets, the Stochastic Oscillator works best with consistent trading ranges.

Two classic trading strategies for the Stochastic Oscillator are based on %K and %D line crossovers and Stochastics vs. price divergence. The crossover strategy uses %K crossing above %D as a buy signal and the inverse as a sell signal – %K crossing below %D. Various period settings for the indicator and time-frames may be used to find the appropriate crossover strategy. Stochastic divergence from price direction may indicate a loss of momentum in the market, helping traders spot reversals.

Stochastic Oscillator

Stochastic divergence signaling a reversal in Gold Futures

Stochastic Oscillator

Potential buy and sell signals using Stochastic crossovers in E-mini S&P 500 Futures (ES).

Two Additional Indicators

The Stochastics Fast indicator is similar to the default Stochastic Oscillator, but without the smoothing parameter. It still plots %K and %D on the chart but does not apply any additional smoothing to these lines displaying the raw output of the Stochastic formula. Since the Stochastic Oscillator is prone to false signals during volatile markets, introducing additional smoothing in the regular “Stochastics” indicator makes sense for many.

The Stochastics RSI indicator calculates the Stochastic formula on the RSI indicator, rather than price action, applying another layer of calculation to the classic momentum oscillator.

Stochastic Oscillator

Stochastics, Stochastics Fast, and Stoch RSI indicators on one chart.

Putting it Together

The Stochastic Oscillator is a major staple for traders of all asset classes. That said, it can be prone to false signals, so it is always recommended to use it in combination with various other tools. Whether you are interested in adding Stochastics to moving averages, Fibonacci, Bollinger Bands®, or Candlestick Patterns, NinjaTrader provides all the tools you need to analyze your favorite markets.

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