Stochastic Trading Indicator Overbought & Oversold Levels

Stochastic oscillator indicator is used to look for overbought/oversold 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 such as RSI indicator the Stochastic oscillator indicator can stay inside the overbought & oversold levels for some time. When this Stock Indices stochastic oscillator indicator stays within these levels for a long time it indicates strong upwards trend (overbought) or strong downwards trend (oversold).

When the stochastic lines cross back below or above these overbought & oversold levels it's usually a good indication of an upcoming Stock Index trend reversal.

A trader can look for further forex signals to make the oversold or overbought levels more reliable if:

Buy Signal Using Stochastic Oscillator Oversold Levels

• Before Buying a stock index instrument, %K & %D lines turn upward from below 5%.
• A reading that's floating near 5% means that Stock Index bears are in control and there is selling of the instrument. A trader should wait for the Stochastic Oscillator to move back above 5% as a sign that the selling pressure is easing.

The Buy signal is confirmed when the stochastic oscillator indicator moves above oversold, then after a while returns to oversold but this time moves up immediately without staying at the overbought.

Buy Signal Using Stochastic Oscillator Oversold Levels

Sell Signal Using Stochastic Oscillator Overbought Levels

• Before Selling a stock index instrument, %K & %D lines turn down from above 95%.
• A reading that's floating above 95% means that Stock Index bulls are in control and there is buying of the instrument. A trader should wait for the Stochastic to move below 95% as a sign that the buying pressure is easing.
• The sell trading signal is confirmed when the stochastic moves below overbought, then after a while returns to overbought but this times moves down immediately without staying at the overbought.

Sell Signal Using Stochastic Oscillator Overbought Levels

Looking at different trading chart time frames when using oversold and overbought levels can also help to determine the correct entry strategy when opening a Stock Indices 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 Stock Indices trading signals on the shorter chart time frame periods.