The Stochastic Oscillator, introduced by George Lane, is based on the idea that when an asset, or in our particular case, a pair is in a bullish trend, price usually tends to close in on session highs and, when the trend is bearish, price will tend to close in on session lows.

The oscillator is formed by two lines, named %K and %D. The %K line tries to find a relationship between highs, lows and closing prices. The %D line calculates the simple moving average of %K across N periods, and the idea is to show us when a pair is oversold or overbought. Both lines move in between 0/100 range, meaning it is a closed indicator useful to identify cycles.

The problem here is that when the market is in a well-defined trend, signals are usually fake as the oscillator tends to get saturated in the extremes and is unable to follow price action.

This oscillator produces many crosses, sometimes rather violent, and that is why there is very useful modified version, formed by the same lines, but changing the number of periods involved, to filter fake signals. We should combine a slow one, 14-7-3, with a faster one by changing the default values to 5-3-3 (another variant is 8-5-3).

Both stochastics will filter each other, giving more accurate entry points, once they reenter either extreme. As a comment regarding the probability of seeing the indicator becoming saturated in its extremes, it is worth it to set entry levels at 20 and 80, rather than 30 or 70. With this combination, the faster one will give you the first warning of a probable trend change that will then be confirmed by the faster one. Follow the settings and test it: you will find it quite useful for almost any major pair, in four-hour charts or even smaller time frames.