Stochastic Oscillator Indices Technical Analysis & Stochastic Oscillator Signals

Created by George C. Lane

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

Stochastic Oscillator 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 and %D.

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

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

There are Three types are: fast, slow and full Stochastic. The 3 indicators look at a given 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 to calculate the stochastic.

This oscillator works on the principle that:

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

This indicator shows the momentum of the trends, & identifies the times when a market is overbought or oversold.

Stock Indices Technical Analysis & How to Generate Signals

Most common techniques used for analysis of Stochastic Oscillators to generate signals are cross overs signals, divergence signals & over bought oversold areas. The following are the techniques used for generating trade signals

Stock Indices Crossover Trade 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 down)

50-level Crossover:

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

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

Divergence Stock Indices Trading

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

This is used to determine potential trend reversal stock trade signals.

Upward/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

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

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

Indices Trend reversal - identified by a classic bullish divergence

Overbought/Oversold Levels on Indicator

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

Overbought values greater than 70 level - A sell signal occurs when the oscillator rises above 70% and then falls below this level.

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

Overbought - Values Greater 70

Oversold values less than 30 level - a buy signal is generated when the oscillator goes below 30% and then rises above this level.

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

Oversold - Values Less Than 30

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