Color Stochastic Indicator for MT4

August 16, 2021

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Introduction to the Color Stochastic Indicator

The classic Stochastic Oscillator was developed by George Lane during the 1950s. This indicator allowed traders to identify the direction of momentum, as well as overbought and oversold price levels, using an oscillator type of indicator.

The Color Stochastic Indicator is a modification of the classic Stochastic Oscillator which allows traders more control over the indicator. It also provides indications of overbought and oversold price levels by changing the color of one of its stochastic lines.

What is the Color Stochastic Indicator?

The Color Stochastic Indicator is a momentum indicator which is based on one of the most popular oscillators, which is the Stochastic Oscillator.

This indicator plots two lines which oscillate within the range of zero to 100. The lines that this indicator plots changes color to identify overbought and oversold markets. It plots a lime line to indicate an overbought market and a red line to indicate an oversold market.

How the Color Stochastic Indicator Works?

The Color Stochastic Indicator has a similar method for computing its stochastic lines just as with the classic Stochastic Oscillator. The difference is that it has various methods for computing momentum which can be based on a Simple Moving Average (SMA), Exponential Moving Average (EMA), Smoothed Moving Average (SMMA), and Linear Weighted Moving Average (LWMA).

The color of the faster stochastic line also changes to lime whenever the line is above 80 and red whenever the line is below 20.

How to use the Color Stochastic Indicator for MT4

This indicator has several settings which can modify the characteristics of its stochastic lines.

“KPeriod”, “DPeriod”, and “Slowing” refer to the number of bars the indicator uses for its computation much like the classic Stochastic Oscillator.

“MAMethod” modifies the type of moving average used within its formula.

“overbought” and “oversold” refers to the threshold levels wherein the color of the faster stochastic line would change to indicate overbought and oversold market levels.

Buy Trade Setup

When to Enter?

Wait for the faster stochastic line to change to red. Open a buy order on the confluence of a bullish candlestick pattern and the faster stochastic line crossing above 20. Set the stop loss on the support below the entry candle.

When to Exit?

Close the trade as soon as price action shows signs of a bearish reversal.

Sell Trade Setup

When to Enter?

Wait for the faster stochastic line to change to lime. Open a sell order on the confluence of a bearish candlestick pattern and the faster stochastic line crossing below 80. Set the stop loss on the resistance above the entry candle.

When to Exit?

Close the trade as soon as price action shows signs of a bullish reversal.

Conclusion

The Color Stochastic Indicator can be a very useful indicator when trading mean reversals coming from overbought and oversold price levels.

The preset settings of this indicator are directed towards the longer-term trends and oscillations. Users can adjust this to allow for faster signals.

It is also best to use this indicator in confluence with a longer-term trend and price action as this would allow for better accuracy on each trade.