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.
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 & 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 upward 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 and 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 technical indicator & the price.
This is used to determine potential trend reversal stock trade signals.
Upward/rising trend reversal - identified by a classic bearish divergence
Indices Trend reversal - identified by a classic bearish divergence
Downward/descending trend reversal - identified by a classic bullish divergence
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 - Values Greater 70
- Oversold values less than 30 level - a buy signal is generated when the oscillator goes below 30% & then rises above this level.
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.
