What Is The Double Stochastic Oscillator & How To Trade With It

Double Stochastic Oscillator

The Double Stochastic Oscillator gets its name from the standard Stochastic Oscillator. It is a momentum-based oscillator, showing the current closing price to a high/low range over a specified period. George C. Lane, a technical analyst, claimed the creation of Stochastic Oscillators in the 1950s.

What is the Double Stochastic Oscillator?

The Double Stochastic Oscillator oscillates between 0 and 100. During an uptrend, the Double Stochastic Oscillator displays the price on the high range. Conversely, in a downtrend, the Double Stochastic Oscillator shows the price on the low range.

The oscillator consists of two lines; the K% and D%. K% represents the periods, and it is the fast line. D% indicates the moving average of K% and is the slow line.

On the chart below, the purple line represents the overbought, while lime green represents oversold. Black line is K% and the red line is D%.

Double Stochastic Oscillator on a chart
Double Stochastic Oscillator on a chart

Following are the equations for K% and D%:

  • Fast %K = ((Todays Close – Lowest Low in %K Periods) / (Highest High in %K Periods – Lowest Low in %K Periods)) x 100
  • Slowing %K = n-period moving average of Fast %K
  • Double %K = ((Todays Slowing %K – Lowest Low Slowing %K in %K Periods) / (Highest High Slowing %K in %K Periods – Lowest Low Slowing %K in %K Periods)) x 100
  • Double Slowing %K = n-period moving average of Double %K
  • %D = 3-period SMA of Double Slowing %K

A buy signal occurs when the K% line drops below 20. A sell signal appears when the K% rises just below 100 and is downwards.

When setting Double Stochastic Oscillator on MT4, you can change the Stochastic or the Smoothing period and the levels.

Double Stochastic Oscillator parameters
Double Stochastic Oscillator parameters

How to use the Double Stochastic Oscillator?

You can use Double Stochastic Oscillator to find crossovers.

If the K% line crosses the above the 50, you may go long, and if the D% crosses below 50, you may go short.

A bullish divergence occurs when the price is at lower low, and the Double Stochastic Oscillator is at a higher low. In this situation, the oscillator breaks above the 50 level.

Conversely, a bearish divergence occurs when the price is at higher high, and the Double Stochastic Oscillator is at lower high. Here the oscillator breaks below 50.

Double Stochastic Oscillator bearish and bullish divergence
Double Stochastic Oscillator bearish and bullish divergence

For overbought and oversold conditions, the Double Stochastic Oscillator has different values. Here when the oscillator is at or above the 80 level, overbought conditions occur. And, when the oscillator is at or below the 20 level, oversold conditions appear.

A buy signal is produced when the oscillator falls below 20 and jumps above it and sell signal when the Double Stochastic Oscillator climbs above 80 and then moves back.

Double Stochastic Oscillator trading strategy

The Double Stochastic Oscillator is applicable in different strategies like Scalping, Intraday, and Swing. I find that oscillators work best with the longer timeframes as there tends to be less market noise.

One of the strategies that you can apply with the Double Stochastic Oscillator is combining it with the MACD (moving average convergence divergence).

As the MACD helps determine the trend’s strength, it can be used with the Double Stochastic Oscillator.

Double Stochastic Oscillator buy strategy

  • The K% should drop below the 20 level.
  • Wait for the price bar to go bullish.
  • Place the stop-loss near the swing low area.
  • Exit the trade when the K% jumps above the 20 level.
Double Stochastic Oscillator buy setup
Double Stochastic Oscillator buy setup

Double Stochastic Oscillator sell strategy

  • The K % should be above the 80 level.
  • Wait for the price bar to go bearish.
  • Set a stop-loss near the swing low area.
  • Exit the trade when the K% drops below the 80 level.
Double Stochastic Oscillator sell setup
Double Stochastic Oscillator sell setup

Double Stochastic Oscillator Conclusion

The Double Stochastic Oscillator, just like the traditional Stochastic Oscillator, can be useful for determining trend reversals and market trends. You can use the oscillator in Scalping, Swing, Intra-day, and day trading strategies. Combining it with candlestick patterns or MACD can enhance your trading strategies.

I would prefer to use the majority of technical indicators such as the Double Stochastic Oscillator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Double Stochastic Oscillator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Double Stochastic Oscillator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Double Stochastic Oscillator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!