Stochastic Indicator Over-bought & Oversold Levels
Stochastic oscillator indicator is used to look for over-bought/over-sold trading signals. Overbought levels are above 80% level and oversold levels are below 20% level.
The key is to not only look at Stochastic oscillator indicator when the %K or %D lines touch or cross overbought/oversold, but also when they cross over & back through these levels.
Just as with other Indices momentum indicators like RSI indicator the Stochastic oscillator indicator can stay inside the overbought and oversold levels for a while. When this Index stochastic oscillator indicator stays within these levels for a long time it indicates strong upward market trend (overbought) or strong downwards trend (oversold).
When the stochastic lines cross back below or above these overbought & oversold levels it's generally a good indication of an upcoming Index trend reversal.
A trader can look for further signals to make the over-sold or over-bought levels more reliable if:
Buy Signal Using Stochastics Oscillator Over-sold Levels
- Before Buying a stock index instrument, %K & %D lines turn upward from below 5%.
- A reading that is floating near 5% means that Index bears are in control and there is selling of the instrument. One should wait for the Stochastic Oscillator to move back above 5% as a sign that selling pressure is easing.
The Buy signal is confirmed when the stochastic oscillator indicator goes above oversold, then after a while returns to over-sold but this time it moves upward immediately without it staying at the oversold.
Buy Signal Using Stochastics Oscillator Over-sold Levels
Sell Signal Using Stochastics Oscillator Over-bought Levels
- Before Selling a stock index instrument, %K & %D lines turn down from above 95%.
- A reading that is floating above 95% means that Index bulls are in control and there is buying of the instrument. One should wait for the Stochastic to move below 95% as a sign that the buying pressure is easing.
- The sell trading signal gets to be confirmed when the stochastic indicator goes below overbought, then after a while returns to overbought but this time moves downward immediately without staying at the over-bought.
Sell Signal Using Stochastic Oscillator Over-bought Levels
Looking at different chart timeframes when using over-sold and overbought levels can also help to figure out the correct entry strategy when opening a Index trade.
The main theory is to trade with the market trend. Always double check the signals with the longer term stochastic oscillator indicators to confirm Index trading signals on the shorter chart time-frame periods.
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