Stochastic Definition, Advantages, and How to Read It

In the world of trading, those of you who are experienced in it must be familiar with the term Stochastic. This is because the stochastic is one of the most popular calculation methods. Well, for beginners who may be unfamiliar with this term, of course it is mandatory to know and learn it.

To start trading with technical techniques, of course the trader must use at least one of the many trading indicators. You can use these indicators according to your preferences and understanding. The stochastic indicator is one that is quite often used.

You need to know, in the world of trading daily profit, the use of the stochastic indicator can help traders predict long-term trends. For long-term traders, of course, will project maximum profit. So, what is the stochastic indicator?

Definition of Stochastic Indicator in Trading and Crypto

In simple terms, the stochastic method is a guide or indicator in trading which has the function of showing buy and sell signals through two intersecting lines.

In trading, the Stochastic Oscillator (SO) belongs to the momentum type indicator group. When viewed based on the technique used, Stochastic’s goal is to show the last closing trading price. The trick is to calculate the difference between the lowest and highest prices in a certain period of time.

How to Read the Stochastic Indicator in Trading

You need to know beforehand, the Stochastic Indicator has two main components, namely complex and multipurpose. These two components play a role in providing clues about various conditions that will occur. Such as overbought and oversold, entry trading, and divergence.

Before starting trading, you should have a good understanding of how the measurement reading mechanism is based on each function by knowing the three functions and researching each one.

Here’s how to read and understand the stochastic oscillator based on its various functions. Listen to the end!

  • How to Read Indicators As Overbought-Oversold Markers

Among the three stochastic functions, this indicator is the easiest to understand. Basically, the stochastic indicator created by George Lane has two extreme levels. The two levels are level 80 and 20.

Figures 80 and 20 in extreme levels in the stock stochastic are overbought and oversold limits . Simply put, overbought conditions on the stochastic indicator will be seen when the chart touches or is above the 80 level. 

If overbought shows the chart at the level of 80 or above, oversold indicates the opposite. The stochastic indicator will show oversold conditions when the chart is at 20 or more below it.

For more details, you can observe the following illustration presentation.

Although the technique is fairly simple, it doesn’t mean you have to or immediately enter when the indicator shows its lowest level. In various cases, there are times where after touching the 20 level, the chart actually goes up.

For that, you also need to know the following types.

  • How to Read Stochastic Indicator Trading Entry Instructions

In the process of finding entry signals, you should make observations of the crossing %K and %D lines. In this case, you will have a buy signal detected when the %K line crosses the %D line with the %K line positioning from top to bottom. Confused? Here’s an illustration.

The image above shows the stochastic indicator as a guide for Entry Trading using the MetaTrader 4 platform. By default, the platform shows %K in green and %D appears as a red dotted chart.

  • How to Read the Stochastic Indicator with Divergence

In the world of trading, the term divergence means to focus on the difference between price movements and indicators. This concentration will be useful in the prediction process when the price trend continues or reverses direction.

Divergence has a characteristic that you can see from the peak ( high ) and bottom ( low ) which consists of a set of signal lines. When the high and low positions are getting lower, it can be said that the momentum is weakening. When the high and low positions are getting higher, the momentum of the movement is strengthening.

Advantages of Trading Using the Stochastic Indicator

As previously written, the stochastic is an indicator that is often used by traders. In addition to the relatively simple theory and practice, this one indicator has various advantages. Anything? Check out the following.

  • Give a Signal When Price Weakness Occurs

As has become its trademark, the stochastic indicator will give a signal when there is a weakening of prices on the stock exchange. Thus, traders can use the stochastic indicator signal as one of the cornerstones of making decisions in trading.

  • More ”Sensitive” Stochastic Indicator

The stochastic indicator also has another characteristic, namely its ”sensitive”. Of course this is one of the advantages as well. Unfortunately, this advantage can also be a drawback.

By being ”sensitive”, the indicator will show signals early, also potentially catching false signals. To avoid spurious signals, due to their sensitive nature, you need more than just %D to smooth them out.

  • You Can Apply In A Sideway And Profitable Market

This is also an advantage of the stochastic indicator, where its use is flexible. You can apply this indicator to a market that is flat, or a market that is in a profitable phase.


When drawn conclusions, the stochastic analysis method is one of the easiest methods to understand and is widely used by traders. Moreover, the stochastic indicator itself has many advantages.

Even so, it is undeniable that the stochastic indicator also has shortcomings. One of them is the possibility of false signals.

Those were the various ways you can do with the stochastic indicator. The stochastic indicator is one of the methods that you can learn before starting to enter the world of trading. Did you learn anything new from this article? Don’t forget to share it on your social media accounts, ok?