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Understanding the market for different cryptocurrencies is extremely challenging, as new technologies and innovative products are continually developed. Furthermore, cryptocurrency markets can fluctuate on seemingly trivial news, making investments difficult unless you have a superior understanding of the market.

That’s where technical indicators come in, allowing you to use historical data to make more informed trades. One of the important technical indicators to consider is the stochastic oscillator.

What is the stochastic oscillator?

Developed in the late 1950s, the stochastic oscillator is a metric for understanding the momentum of a stock’s price over a set time period. It compares the closing price of a stock to the price range over a set period of time, using both the lows and highs of the stock and the current market rate to produce trend signals.

The stochastic oscillator is extremely useful at identifying two things: predicting incoming bearish or bullish trends, and detecting when a stock is overbought or oversold.

This indicator helps predict bearish or bullish trends with the output of the built-in formula it uses. If the output is low, it indicates a bearish trend; likewise, if high, it indicates a bullish trend.

The oscillator is used to find oversold and overbought stocks by looking for outputs above 80 or below 20. These outputs correspond to a stock trading near its high (overbought) or near its low (oversold), respectively. 

How can the stochastic oscillator be used for cryptocurrencies?

While the stochastic oscillator is usually applied to more traditional securities, it can certainly be used for crypto. If you’re considering purchasing a cryptocurrency, it is definitely wise to check if it’s currently overbought or oversold — if oversold, then it’s likely a good time to buy (barring poor news about the currency).

You can also check how volatile the crypto is by checking its momentum. When using the stochastic oscillator for cryptocurrencies, it’s recommended that you use a 14-day trading window for more popular currencies and a 7-day window for crypto with less volume. You can pick an arbitrary time of day to use as the closing price for that period as well.

Want to put this into practice? You can sign up for free today at drivemarkets.com and begin trading immediately.

DRIVE Insider is not an investment advisor. We do not provide personalized recommendations or views as to whether a cryptocurrency or investment approach is suited to the financial needs of a specific individual.

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