When you want to invest in a crypto project, it’s all about choosing the right moment. Just like RSI the stochastic oscillator is an indicator for oversold or overbought assets. The major difference between the two, is that stochastic oscillators are more suited for trading that works with closing and opening moments. The crypto market is 24/7, which makes the usage of it a bit more tricky.
Both RSI and the stochastic oscillator and indicators that show price momentum, and both are used to forecast market trends. The stochastic oscillator is predicting based on the assumption that the closing price near the same direction of the trend. While RSI tracks the amount of buying happening during a certain trend, and bases its oversold or overbought prediction on those trends.
The stochastic oscillator can be calculated by the following formula. However this is something you don’t really need to worry about, as most online exchanges have incorporated the SO into their basic tool set for traders.
Slow %K= 100 [Sum of the (C - L14) for the %K Slowing Period / Sum of the (H14 – L14) for the %K Slowing Period]
Slow %D = SMA of Slow %K
- C = Latest Close
- L14 = Lowest low for the last 14 periods
- H14 = Highest high for the same 14 periods
- %K Slowing Period = 3.
How to read the Stochastic Oscillator
Just like the RSI, the stochastic oscillator is an indicator that goes from 0 to 100. The rules of this indicator state that everything above 80 is considered overbought, while everything below 20 is oversold. This means that price rallies usually slow down when one of these regions is reached.
As you can see in the formula, the S.O. consists out of two lines: the Slow %K and the Slow %D. When these two lines cross each other in an overbought or oversold area, it generally means there’s a trend reversal coming up. Even though the indications are the strongest in those area, a trend reversal can also pop-up in the middle area of the S.O. charts… and also then, the two lines will cross each other.
Please keep the following in mind: The Stochastic Oscillator works best when you’re dealing with an asset of high volume. Bitcoin would be an example of that, because it’s an asset to traded a lot.