Stochastic Oscillator Stock Indices Technical Analysis and Stochastic Oscillator Stock Indices Signals

Developed by George C. Lane

The Stochastic Oscillator is a momentum indicator - it shows the relation between the current closing stock index 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 stock indices trend market the stock index price closes near the high of the stock index price range & in a downward trending market the stock index price will close near the low of the stock index 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 Stochastics Stock Indices Trading Oscillators: Fast, Slow & Full Stochastics

There are Three types are: fast, slow and full Stochastic. Three indicators look at a given chart period for examples the 14-day period, and measures how the stock index price of today’s close compares to the high/low range of the time period that's being used to calculate the stochastic.

This oscillator works on the principle that:

• In an upward stock indices trend, stock index price tends to close at the high of the candlestick.
• In a downwards stock indices trend, stock index price tends to close at the low of the candlestick.

This indices technical indicator shows the momentum of the Stock Indices trends, and identifies the times when a market is overbought or oversold.

Indices Technical Analysis & How to Generate Trading Signals

Most common techniques used for analysis of Stochastic Oscillators to generate stock index trading signals are cross overs trading signals, divergence signals & overbought oversold levels. Following are the techniques used for generating signals

Indices Trading Crossover Trading Signals

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

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

50-level Crossover:

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

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

Divergence Indices

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

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

Upward/rising stock indices trend reversal - identified by a classic bearish divergence

Stock Indices Trend reversal - identified by a classic bearish divergence

Downwards/descending stock indices trend reversal - identified by a classic bullish divergence

Stock Indices Trend reversal - identified by a classic bullish divergence

Overbought/Oversold Levels on Technical Indicator

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

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

Overbought - Values Greater 70

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

Oversold - Values Less Than 30

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