Trade Stock Indices

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.

It is important to not only monitor the Stochastic oscillator when the %K or %D lines touch or cross the overbought or oversold levels but also when they cross and revert through these levels.

Just as with other Indices momentum indicators like RSI technical 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 stochastic lines cross back below or above the overbought and oversold marks, it usually suggests that an Index trend might reverse soon.

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 Stochastics Indicator to move back above 5% as a sign that selling pressure is easing.


The buy signal confirms when the stochastic oscillator rises above oversold. It dips back but quickly moves up without lingering low.

Stochastic Overbought & Oversold Levels - Generating Buy & Sell Signal Using Stochastics Oscillator Indicator

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 downwards 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.


Stochastic Overbought & Oversold Levels - Generating Buy & Sell Signal Using Stochastic Indicator

Sell Signal Using Stochastics Indicator 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.

Trade along with the market's flow. Check signals against longer stochastic oscillators. This confirms index trades on short time frames.

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