Stochastic Oscillator’s goal is pretty much the same of Relative Strength Index. In fact, like the RSI, it is useful to determine the hyper-areas of a given asset. Despite of this, some experts believe Stochastic Oscillator more precise than RSI, but for this even more complex.
The Stochastic Oscillator is based on more articulated algorithms; for example, one of its values, is given by the calculation of amplitude candles. As the RSI it is split on three areas: a central area, an over-bought area set on 80% and an over-sold area set on 20%. Unlike the RSI the stochastic oscillator uses two lines: one is the line of the fast stochastic or % K line, while the other is the stochastic slow line or % D line, which is nothing more than a moving average on the line % K . The K letter represents the percentage of the closing price measured in a given period.
As you can see, the Stochastic looks like a two- parameters RSI, and it also is used to take advantage of the trend reversals and to calculate the maximum and the minimum price. Stochastic is interpreted as follows:
- If the price is over-bought and then retracts again is a very good signal to open a SELL position
- If the price is on over-sold there are good opportunities to open a BUY position.
In the picture the oscillator stays for few minutes on over-bought area, so we will open a position when the K line will intersect the D line from top to bottom. Viceversa, in the case of over-sold.
Finally the Stochastic Oscillator is a great tool, but like all indicators, it is good to use it as an intensifier. What is clear it is that, also in this case, the indicator may not be used for 60 seconds timeframe investments, unless you should study the right parameters suitable for this purpose. But it is known that RSI for 60 seconds options, is much more capable than the Stochastic.