Last week we learnt about the RSI indicator and how we can use it to create our crypto trading strategies. Another momentum indicator that you can use to help you predict token market trends is the stochastic oscillator. And don't worry despite a name that rolls strangely on the tongue, this is another crypto trading indicator that we can benefit from simply understanding what the returned value means and do not necessarily need to understand the mathematical equation fully.
What is the stochastic oscillator?
Like many indicators we find being used by traders in crypto, the stochastic is not unique to the world of blockchain: it is used in numerous different markets. The stochastic indicator compares the closing price of the asset with its high-low range over the selected period of time(usually 14 days). The assumption is that an asset's closing prices should reflect or be very close to the market's current trend. One reason it is loved by crypto traders is that it is known to work no matter what the volatility of an asset, which we know in the never sleeping world of trading coins and tokens can be a big influence.
How does it work?
Just like the RSI indicator, the stochastic is measured on a scale of 0 to 100, and this will be generally plotted on a chart - most trading platforms will display this under the asset's price candlestick chart so that you can easily make your analysis. For those of you that wish to know, here is the formula:
Stochastic = (C - L14) / (H14 - L14) * 100
C = the most recent closing price.
L14 = the lowest price traded during the past 14 days.
H14 = the highest price traded during the past 14 days.
Now it does not necessarily have to be calculated over 14 days, you could make this any value as long as it that reflects previous trading sessions.
How to interpret the values?
Generally speaking if the stochastic is above 80 then this is pointing towards overbought conditions. Whereas if the area is below 20 then this indicates towards oversold conditions. So, if the stochastic starts to reach an overbought zone then you can expect the price rally to slow down or stop. And going the other way, if the stochastic is returning oversold conditions then that is a great indication that the bears may finally be getting tired!
As we have discussed before, crypto is not always very traditional when it comes to trading so you may need to adjust your indicators depending on which coin or token you are trading. You may find for the market you are trading in that reading the token's stochastic with 70 / 30 in mind, returns more profitable results. This is something that really you can only figure out with the experience of trading a token and putting together your own crypto trading strategies.
Automating crypto trading indicators is the key to success
It is also why we believe automating crypto indicators is key for allowing traders to spot profitable trades. It just comes down to the logical conclusion that less time calculating, means more time spotting trends, creating your overall trading strategy and deciding your trades accordingly. Something we are actively working towards providing you on our platform, here is a little preview of how automated orderbook analysis can look:
Just a sneak peek for now, but we will talk more about this feature in our next blog post! And of course, walk you through what the values mean. The innovation we have planned to help you make profitable trades and that our current Saturn HODL token sale is helping to bring to life.
Does the stochastic indicator work for trading crypto?
Let's have a look at how Saturn Classic has been trading during April, and see what trends we may have spotted if we were actively able to monitor its stochastic oscillator.
- Point A: We can see here that the stochastic had been dropping steadily and that by the 3rd April, it was 24. This is representing clear oversold conditions, Saturn Classic was trading at around 0.000041 ETC over this period with pretty low volume. Sure enough, the bears did get tired, the market started to pick up a couple of days later with more volume, more buying and the average price going back up to 0.00005 ETC.
- Point B: This is the real end of the price rally that happened after point A. On the 9th April, Saturn Classic's stochastic reached 100. This is clear overbought conditions! Sure enough during the period that followed we saw some of the lowest Saturn Classic prices, at one point 0.000025 ETC.
Hope you enjoyed learning about the Stochastic Oscillator, it is also important to remember it is a leading indicator. This means that it is an indicator that precedes price movements, which means if you read it right, it becomes a very strong prediction tool. Of course, nobody can tell the future so there is also a higher chance that this indicator may sometimes show you the wrong way. If you are less about taking risks, then you may want to stick to using a lagging indicator such as when we looked at calculating Simple Moving Averages.
Hope you enjoyed learning how trade a token's stochastic oscillator to make profitable crypto trading strategies! If so, then be sure to follow us on Twitter, subscribe to our newsletter & join our community forum.