Stochastic Histogram Indicator

The Stochastic Histogram is a technical MT4 indicator that can consistently generate trend signals on Forex and Stocks charts.

In technical trading, an overbought or oversold price condition is considered a key price swing level. Such market conditions help traders anticipate counter-trend and pullback trading opportunities.

Momentum indicators like Relative Strength Index (RSI) and MACD can outline an overbought/oversold market. But the Stochastic Histogram is the simplest momentum indicator that works for traders with any level of prior trading experience.

Technically, the Stochastic Histogram fits swing trading strategies. This method enables you to place buy at the bottom and sell at the top of a market range.

This guide will explain how to assess solid changes in market trends using the Stochastic Histogram oscillator in MT4.

What is the Stochastic Histogram Indicator?

A stochastic Histogram closely tracks the strength/weakness of the price momentum. You can use its information to predict an upcoming trend. If you notice a bullish or bearish momentum is losing its strength, you may prepare for a potential trend reversal.

Stochastic Histogram Chart Setup
Stochastic Histogram Chart Setup

The indicator value above zero is typically seen as a bullish trend signal, whereas a negative value indicates a bearish trend. However, these are not usually signs of an oncoming reversal; strong trends can keep overbought or oversold circumstances for a long time.

Instead, traders can watch for movements in the stochastic histogram to provide information about potential trend changes. You can consider the histogram signal a confluence to your trading decision once it matches relevant price action setups.

For example, the price bounce from a strong support zone while the histogram value turns positive, indicating a long entry opportunity. Oppositely, you may go short once the price gets rejected from a resistance, with the indicator value turning negative.

Furthermore, the divergence between price action and the Stochastic histogram is considered a key counter-trend trading opportunity. For example, a bullish trend pushes the price to a new high. Meanwhile, the histogram prints a lower high, indicating bulls are getting weaker and the market is preparing for a potential bearish trend reversal.

Stochastic Histogram Trading Strategy

Buy Signal

  • The price rejects support or breaks above resistance.
  • Stochastic Histogram bars turn green and appear above the zero level.
  • Hold long until the histogram bars drop below zero.
Stochastic Histogram Buy Signal
Stochastic Histogram Buy Signal

Sell Signal

  • The price rejects resistance or breaks below support.
  • Stochastic Histogram bars turn red and appear below the zero level.
  • Hold short until the histogram bars jump above zero.
Stochastic Histogram Sell Signal
Stochastic Histogram Sell Signal

Stochastic Histogram Indicator Pros/Cons

Pros

  • Everyone can read Stochastic Histogram signals.
  • Demonstrates momentum strength/weakness.
  • A beginner-friendly technical indicator.

Cons

  • May perform inconsistently in irregularly volatile market conditions.

Conclusion

Most trading platforms feature the Stochastic Histogram, which is simple to use and easy to follow. The time frame is typically 14 days. However, it can be changed to suit certain analytical requirements. It suits multi-timeframes and can help you identify buy-sell signals when combined with a proven price action strategy. Besides momentum signals, professional traders also use it to explore hidden divergences leading them to potential trend reversal conditions.