Stochastic Oscillator Indices Technical Analysis & Stochastic Oscillator Signals

Created by George C. Lane

Stochastic Oscillator is a momentum indicator - it shows the relation between the ruling closing price relative to the high & low range over a given number of n periods. The Oscillator Indicator uses a scale of 0-100 to draw its values.

Stochastics Indicator Indices Indicator - Stochastic Indicator Indices Analysis

This Oscillator is based on the theory that in an up trend market the price closes near high of the price range and in a downward trending market the price will close near the low of the price range.

The Stochastic Lines are drawn as 2 lines- %K & %D.

Fast line %K is the main
Slow line %D is the signal

3 Types of Stochastic Oscillators: Fast, Slow and Full Stochastics

There are 3 types are: fast, slow & full Stochastic. The 3 technical indicators look at a specified chart period for examples the 14-day period, and measures how the price of today's close price compares to the high/low range of the time period that is being used in calculating the stochastic oscillator.

This oscillator indicator works on the principle that:

In an upward trend, price often tends to close at the high of the candlestick.
In a downward trend, price tends to close at the low of the candlestick.

This indicator shows the energy of the trends, and identifies the times when a market is over-bought or oversold.

Indices Technical Analysis and How to Generate Signals

Most common techniques used for analysis of Stochastic Oscillators to generate signals are cross overs signals, divergence signals and overbought oversold areas. The following are the techniques and methods used for generating signals

Stock Index Cross-over Signals

Buy signal - % K line crosses above %D line (both lines heading up)

Sell signal - %K line crosses below the %D line (both lines heading downward)

50-level Cross-over:

Buy signal - when the stochastic indicator lines cross above 50 center mark a buy stock trade signal is generated.

Sell signal - when stochastic technical indicator lines cross below the 50 center mark a sell stock trade signal is generated.

Divergence Indices Trade

Stochastic is also used to look for divergences between this technical indicator and the price.

This is used to identify potential price trend reversal stock signals.

Upwards/rising trend reversal - identified by a classic bearish divergence

trend reversal - identified by a classic bearish divergence - Stochastic Technical Indicator Analysis

Indices Trend reversal - identified by a classic bearish divergence setup

Downward/descending trend reversal - identified by a classic bullish divergence

identified by a classic bullish divergence - Stochastic Oscillator Technical Best Indicator Combination

Indices Trend reversal - identified by a classic bullish divergence setup

Overbought/Over-sold Levels in Indicator

Stochastic is mainly used to identify the potential overbought & oversold conditions in trading price movements.

Over-bought values greater than 70 level - A sell signal happens when the oscillator rises above 70% and then falls below this technical level.

Overbought levels Stochastic Oscillator Technical values greater 70 - Stochastic Indicator Stock Analysis

Overbought - Values Greater 70

Oversold values less than 30 level - a buy signal gets derived & generated when the oscillator moving below 30% and then rises above this technical level.

Oversold levels Stochastic Oscillator values less than 30 - Stochastic Technical Indicator Stock Analysis

Oversold - Values Less Than 30

Trades are derived and generated when Stochastics Indicator crosses these levels. However, overbought/oversold levels are prone to whipsaws especially when the market is trending upwards or downward.

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