The Double Stochastic Oscillator gets its name from the standard Stochastic Oscillator. It is a momentum-based oscillator, showing the current closing price to a high/low range over a specified period. George C. Lane, a technical analyst, claimed the creation of Stochastic Oscillators in the 1950s. Like the original stochastic oscillator, it is a momentum-based indicator, reflecting the current closing price in relation to the high/low range over a specified period. It oscillates between 0 and 100. The Double Stochastic Oscillator presumes that during an uptrend the price will close in proximity to the high of the range and during a downtrend the price will close in proximity to the low of the range. The Double Stochastic Oscillator is presented by two lines – %K, the main (fast) line and %D, the signal (slow) line.
What is the Double Stochastic Oscillator?
The Double Stochastic Oscillator oscillates between 0 and 100. During an uptrend, the Double Stochastic Oscillator displays the price on the high range. Conversely, in a downtrend, the Double Stochastic Oscillator shows the price on the low range.
The oscillator consists of two lines; the K% and D%. K% represents the periods, and it is the fast line. D% indicates the moving average of K% and is the slow line.
On the chart below, the purple line represents the overbought, while lime green represents oversold. Black line is K% and the red line is D%.
Following are the equations for K% and D%:
- Fast %K = ((Todays Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) x 100
- Slowing %K = n-period moving average of Fast %K
- Double %K = ((Todays Slowing %K – Lowest Low Slowing %K in %K Periods) / (Highest High Slowing %K in %K Periods – Lowest Low Slowing %K in %K Periods)) x 100
- Double Slowing %K = n-period moving average of Double %K
- %D = 3-period SMA of Double Slowing %K
A buy signal occurs when the K% line drops below 20. A sell signal appears when the K% rises just below 100 and is downwards.
When setting Double Stochastic Oscillator on MT4, you can change the Stochastic or the Smoothing period and the levels.
How to use the Double Stochastic Oscillator?
You can use Double Stochastic Oscillator to find crossovers.
If the K% line crosses the above the 50, you may go long, and if the D% crosses below 50, you may go short.
A bullish divergence occurs when the price is at lower low, and the Double Stochastic Oscillator is at a higher low. In this situation, the oscillator breaks above the 50 level.
Conversely, a bearish divergence occurs when the price is at higher high, and the Double Stochastic Oscillator is at lower high. Here the oscillator breaks below 50.
For overbought and oversold conditions, the Double Stochastic Oscillator has different values. Here when the oscillator is at or above the 80 level, overbought conditions occur. And, when the oscillator is at or below the 20 level, oversold conditions appear.
A buy signal is produced when the oscillator falls below 20 and jumps above it and sell signal when the Double Stochastic Oscillator climbs above 80 and then moves back.
Double Stochastic Oscillator trading strategy
The Double Stochastic Oscillator is applicable in different strategies like Scalping, Intraday, and Swing. I find that oscillators work best with the longer timeframes as there tends to be less market noise.
One of the strategies that you can apply with the Double Stochastic Oscillator is combining it with the MACD (moving average convergence divergence).
As the MACD helps determine the trend’s strength, it can be used with the Double Stochastic Oscillator.
Double Stochastic Oscillator buy strategy
- The K% should drop below the 20 level.
- Wait for the price bar to go bullish.
- Place the stop-loss near the swing low area.
- Exit the trade when the K% jumps above the 20 level.
Double Stochastic Oscillator sell strategy
- The K % should be above the 80 level.
- Wait for the price bar to go bearish.
- Set a stop-loss near the swing low area.
- Exit the trade when the K% drops below the 80 level.
Double Stochastic Oscillator Conclusion
The Double Stochastic Oscillator, just like the traditional Stochastic Oscillator, can be useful for determining trend reversals and market trends. You can use the oscillator in Scalping, Swing, Intra-day, and day trading strategies. Combining it with candlestick patterns or MACD can enhance your trading strategies.
The Stochastic is a very old and very popular oscillator. It shows oversold and overbought areas and thus giving the signals that the trend will reverse. It has some weaknesses though. That is why financial derivatives traders have invented a strategy based on not one, but two Stochastic indicators. It increases the effectiveness of the signals so the probability of success is much higher.
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