Stochastic Indicator Overbought & Oversold Levels

Stochastic oscillator indicator is used to look for overbought/oversold trading signals. Overbought levels are above 80% level & 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 trading momentum indicators such as RSI indicator the Stochastic oscillator indicator can stay inside the overbought & oversold levels for some time. When this indices trading stochastic oscillator stays within these levels for a long time it indicates strong upward indices trend (overbought) or strong downward indices trend (oversold).

When the stochastic lines cross back below or above these overbought and oversold levels it is usually a good indication of an upcoming trend reversal.

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

Buy Signal Using Stochastic Oscillator Oversold Levels

• Before Buying, the %K & %D lines turn upwards from below 5%.
• A reading that is floating near 5% means that indices trading bears are in control and there is selling of indices. 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, the %K and %D lines turn down from above 95%.
• A reading that is floating above 95% means that indices trading bulls are in control and there is buying of indices. A trader should wait for the Stochastic to move below 95% as a sign that the buying pressure is easing.
• The sell stock 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 Trading Signal Using Stochastic Oscillator Overbought Levels

Looking at different chart timeframes when using oversold and overbought levels can also help to determine the correct entry strategy when opening a trade.

The main theory is to trade with the trading market trend. Always double check the trading signals with the longer term stochastic oscillators to confirm trading signals on the shorter chart time frame periods.