# Steemit Crypto Academy Season 3 Week 7 | Homework for Professor @lenonmc21 | Analysis and Trading with the indicators "Stochastic Oscillator +" Parabolic Sar "

Hello everyone. I am well, and I hope you are too. This post is my assignment in response to Professor @Lenonmc21’s assignment on Analysis and Trading with the indicators "Stochastic Oscillator +" Parabolic Sar ". This lecture was full of insight as usual and very educative. I was granted the opportunity to learn new trading indicators, their applications, and their essence. I thank Professor @lenonmc21 once again for this class.

The assignment was given as follows:

Theory (No images)

1. Define in your own words what is the Stochastic Oscillator?
2. Explain and define all components of the stochastic oscillator (% k line,% D line + overbought and oversold limits).
3. Briefly describe at least 2 ways to use the Stochastic Oscillator in a trade.
4. Define in your own words what is Parabolic Sar?
5. Explain in detail what the price must do for the Parabolic Sar to change from bullish to bearish direction and vice versa.
6. Briefly describe at least 2 ways to use Parabolic Sar in a trade?

Practice (Only Use your own images)

1. It shows a step by step on how to add the Stochastic Oscillator to the chart (Indicating the% k Line and the% D Line, the overbought and oversold zone.
2. Show step by step how to add Parabolic Sar to the chart and how it looks in an uptrend and in a downtrend.
3. Add the two indicators (Stochastic Oscillator + Parabolic Sar) and simulate a trade in the same trading view, on how a trade would be taken.

### Define in your own words what is the Stochastic Oscillator?

The Stochastic Oscillator is a technical trading indicator that is utilized for determining the performance of an asset on the markets and was invented by George Lane. The Stochastic Oscillator is mainly used to assess how momentous a stock's price trend is on the markets. The Stochastic Indicator computes the momentum of the asset by considering the closing price point of the stock and its "lookbacks" or the maximum and minimum price points in a given time.

Stochastic Oscillators can be fast or slow. The main distinction between the two depends on how sensitive they are. Fast Stochastic Oscillators have a higher sensitivity to current price changes of the financial asset, whereas the slow Stochastic Oscillator has a lower sensitivity to the change in the price of an asset. In light of these, the fast Stochastic Oscillator creates many signals within a short time period and could render a false or misleading signal to the trader or the investor. The Slow Stochastic Oscillator, on the other hand, produces a much smoother experience and tends to have a high degree of accuracy.

Stochastic Oscillator is a variable that has a value boundary between 100 and 0, where 100 denotes that the current price is the same as the maximum recorded price of that specific range over the designated duration, and 0 means that the recent price is equivalent to the minimum recorded price of that range of the asset’s price over the given period of time. When the Stochastic Oscillator exceeds beyond a designated high boundary, the market is regarded as an Overbought one, whereas when the Stochastic Oscillator recedes beyond a specific low boundary, we call that an Oversold market. This momentum indicator can be utilized together with other indicators by traders or investors to gain a clear understanding of the development of a financial asset on the market.

### Explain and define all components of the stochastic oscillator ![2gsjgna1uruv8X2R8t7XDv5HGXyHWCCu4rKmbB5pmEzjYSjmNF1WH9xVAGsyREWRYvixG1GXQjiVpG5u3nTqgkrV8rXkXwkxZGAQrxbby1dkstsNwx.png](https://cdn.steemitimages.com/DQmXbSKXJre1qKskDxZJSv2CtLLmPD99sJns43GSBJBoMcj/2gsjgna1uruv8X2R8t7XDv5HGXyHWCCu4rKmbB5pmEzjYSjmNF1WH9xVAGsyREWRYvixG1GXQjiVpG5u3nTqgkrV8rXkXwkxZGAQrxbby1dkstsNwx.png)
The Stochastic Oscillator has two main components, which are lines that are plotted graphically when the indicator is selected. The two lines are %K and %D .

The %K line , which is by default represented with a blue color line, is a representation of the comparison between the minimum and the maximum price range of a financial asset on the market within a specific duration of time, and the current closing price of the asset in the form of percentages. The %K line is fast and drawn progressively based on a Mathematical computation as indicated in the formula below:

%K Line = (The Recent Close Price – The Minimum Price of the Selected Time range) / (The Maximum Price of the Selected Time range - The Minimum Price of the Selected Time range)

The %D line , with a default red color, is regarded as a progressive mean of %K. It utilizes the recent three values of %K to develop the moving mean of the “fast Stochastic” or %K line. The %D line, on the other hand, is referred to as the “Slow Stochastic” because it has a low sensitivity to the change in the price of an asset on the market. This is more considered by investors and traders due to its higher degree of accuracy concerning trading signals. It is calculated as below:

%D line = Simple Moving Average of three periods of %K.

As stated early on, the Stochastic Oscillator is bounded between 100 and 0, and that there are two levels of classifications concerning the position of the readings. These levels of categorizations are either referred to as Oversold or Overbought.

When the lines move above the 80 range, it is referred to as Overbought . This level gives a prediction of an impending recession of the line. Hence, traders and investors regard it as a signal to sell. Alternatively, when the reading goes below 20, the Stochastic Oscillator indicates a buy signal as that region is classified as an Oversold one. The Oversold and Overbought ranges are open to configurations, but 20 and 80 are the respective default values.

### Briefly describe at least 2 ways to use the Stochastic Oscillator in a trade.

The Stochastic Oscillator is used for moments when there is a divergence between the performance of the market and the Stochastic Oscillator itself. Divergence is simply defined as the situation whereby the new lows and highs of an asset’s prices are not recognized or taken into consideration by the workings of the Stochastic Oscillator. This event is of essence to traders and investors alike. This is so because the failure of the Stochastic Oscillator to capture the bullish or bearish trend of the asset’s price could be an indication of an imminent reversal of the trend. This in turn helps investors and traders in maximizing the profits and minimizing their losses under certain circumstances.

Furthermore, the Stochastic Oscillator provides Crossover points which are good for indicating selling or buying signals. A Crossover is a point where the %K line (fast stochastic line) crosses the %D line (slow stochastic). When this intersection occurs, two main events can occur. First, when the fast stochastic line moves above the slow stochastic line after they meet, it denotes a likely upwards trend or a bullish trend of the price of the asset. Conversely, when the fast stochastic line recedes below the slow stochastic line after its intersect, it signals a possible downwards or bearish trend.

Additionally, a Stochastic Oscillator can function together with other indicators to give a more accurate look at an asset’s performance on the market, and a fairly accurate prediction of future trends. All these functionalities, together with the Overbought and Oversold levels of Stochastic Oscillators, enable traders and investors to better fathom the market and make a more sound decision regarding their investments or potential investments. This in turn increases the profit margins of traders and guards them against incurring serious losses.

### Define in your own words what is Parabolic Sar?

Created by Wells Wilder, the Parabolic Stop And Reverse Indicator is a tool that is used for the indication of the upwards or downwards trend of the price of an asset on the markets and the likely reversal point of the prices during a specific time period. It is commonly abbreviated as PSAR. Unlike other indicators which employ lines when represented graphically on the chart, Parabolic SAR uses continuous dots. These dots can show up on the candlesticks of the price or below the candlesticks of the price of an asset. This behavior helps traders in identifying possible exit and entry points on the market to increase profits or reduce losses.

When the continuous dots of the PSAR indicator arranged themselves below the candlesticks, it implies an upward or bullish trend in the price of the asset. On the other hand, when the dots are positioned above the candlesticks, the PSAR indicates a downwards or bearish movement of the price of the financial stock or asset. These bearish and bullish signals are also particularly crucial for determining one’s profit and stop-loss targets during trades. Parabolic SAR, when used alone, tends to give falsified signals and are also prone to lagging. Hence, traders regularly use PSAR in combination with other indicators like Average Directional Index, Simple Moving Average Indicator, Exponential Moving Average Indicator, Stochastic Oscillator Indicator, and many others.

### Explain in detail what the price must do for the Parabolic Sar to change from bullish to bearish direction and vice versa

A bearish or downwards trend is portrayed by a Parabolic SAR indicator when the dots are line up in series above the candlesticks or price point within a given period of time in a top-to-bottom fashion. Together, the continuous dots slope downwards graphically. This downward movement will continue until the price of the asset takes a direction of increment. It is only then that a dot will be displayed below the candlestick or the price point element on the chart. If however, the positive change in the asset price was short-lived and resumes a bearish trend, the dots will reappear over the candlesticks or price point continually to denote the downward trend of the price of the asset. Hence, for Parabolic SAR to change from bearish to bullish, the upwards trend of the price must hold for a significant duration of time so the PSAR indicator dots can display continuously below the candlesticks or price points in its bottom-to-top manner.

Parabolic SAR, as stated early on, can also indicate an upwards or bullish movement of the price of an asset. The indicators do so by aligning the dots below the candlesticks or price points in a continuous manner within a particular time period in a bottom-to-top fashion. This upward trend will keep on moving until the asset’s prices experience a significant price drop, then it will momentarily place a dot above the candlestick or price point. If the price drop of the asset is short-lived and the market resumes its bullish trend for an appreciable duration, the dot will again display below the price points or candlestick in a series form. Therefore, for a PSAR bullish trend to change to a bearish trend, the downwards or bearish movement of the stock or asset’s price must hold for a given period of time so the PSAR indicator dots can continue their serial movement above the candlesticks or the price points in its top-to-bottom fashion.

### Briefly describe at least 2 ways to use Parabolic Sar in a trade?

The Parabolic SAR gives good buy or sell indications to traders. When the dot shows below the candlestick or price point, it denotes a potential bullish trend. Hence, it sends a buy signal to the trader. PSAR is known for lagging so traders take precautions with the PSAR market entry signals and usually wait till the dot formations commence in a series format. Likewise, when the dot appears above the price point or the candlestick, the PSAR signals a bearish trend. This provides a sell signal to the traders. Again, these signals are taken carefully taken into consideration since they could be false.

Investors and traders also employ Parabolic SAR in setting the Stop-loss of their trades. For instance, when the price of an asset is dripping and the Parabolic SAR also engages with the downwards trend, the positions of the Parabolic SAR can be employed as the exit point for the trade, thus if the price of the asset recedes beyond that point, the trade will come to a close. This helps traders in managing the extent of their incurred losses. Again, it presents traders with the opportunity to enter the market with a new strategy to maximize profits.

### It shows a step by step on how to add the Stochastic Oscillator to the chart (Indicating the% k Line and the% D Line, the overbought and oversold zone.

• First click on the chart feature on the navigation bar of the Tradingview landing page. The high stock is Apple. Hence it will open the chart for the Apple stock.

• A chart display shows the performance of Apple Inc. in a default selected range of time. Click on the Indicators and Strategies button on the top toolbar.

• The dialog box for Indicators and Strategies show offering diverse built-in indicators.

• Scroll and select Stochastic Indicator.

• The Stochastic Oscillator is added below the chart body.

• The respective components of the Stochastic Oscillator are labeled as below.

### Show step by step how to add Parabolic Sar to the chart and how it looks in an uptrend and in a downtrend.

• First click on the chart feature on the navigation bar of the Tradingview landing page. The high stock is Apple. Hence it will open the chart for the Apple stock.

• A chart display shows the performance of Apple Inc. in a default selected range of time. Click on the Indicators and Strategies button on the top toolbar.

• The dialog box for Indicators and Strategies show offering diverse built-in indicators.

• Scroll and select Parabolic SAR

• The Parabolic SAR indicator is added to the graph. The respective components of PSAR are labeled as denoted in the screenshot.

### Add the two indicators (Stochastic Oscillator + Parabolic Sar) and simulate a trade in the same trading view, on how a trade would be taken.

As discussed earlier, a combination of indicators is paramount for traders to get a fairly accurate look at the performance of an asset on the market. Repeat the steps for adding a stochastic oscillator and PSAR will combine the two indicators on one chart as depicted above.

The PSAR indicator shows an entry point that foreshadows a bearish trend. The corresponding indication of the Stochastic Oscillator demonstrates that the Apple stock has hit an overbought limit and hints at an impending downwards trend. A confirmed bearish trend is later seen on the chart as the prices of Apple Inc. stock continue to dip until there was a reversal.

At the reversal point, the Parabolic SAR forms a series of dots below the candlesticks. This hints at a bullish trend of the price of the Stock. The corresponding indication by the Stochastic Oscillator demonstrates that the stock was in the Oversold limit and foreshadows a potential upwards movement of the price of the Apple Inc. stock. A bullish trend is indeed witnessed afterward on the chart. It continues till there was a short reversal and then resumes its bullish movement.

### Conclusion

These two indicators are seemly weak on their own, but when combined provide a powerful trading experience for traders and investors. The lesson has been educative and interactive. I have learned a lot of new concepts, and I hope to apply them to real trades on the market to make a profit. Special thanks to the Professor for this life-changing experience.

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