Stochastic Oscillator Crude Oil Trading Technical Analysis & Stochastic Oscillator Trading Signals

Developed by George C. Lane

The Stochastic Oscillator is a momentum indicator - it shows the relation between the current closing crude oil 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 oil trend market the crude oil price closes near the high of the crude oil price range & in a downward trending market the crude oil price will close near the low of the crude oil 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 Crude Oil Oscillators: Fast, Slow & Full Stochastics

There are Three types are: fast, slow and full Stochastic. 3 indicators look at a given chart period for example the 14-day period, and measures how the crude oil price of today’s close 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 oil trend, crude oil price tends to close at the high of the candlestick.
• In a downwards oil trend, crude oil price tends to close at the low of the candlestick.

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

Oil Trading Technical Analysis & How to Generate Trading Signals

Most common techniques used for analysis of Stochastic Oscillators to generate oil signals are cross overs trading signals, divergence signals and overbought over-sold levels. The following are the techniques used for generating signals

Oil Trading Crossover Trading Signals

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

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

50-level Crossover:

Buy signal - when stochastic lines cross above 50 a buy oil signal is generated.

Sell signal - when stochastic lines cross below 50 a sell oil signal is generated.

Divergence Oil Trading

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

This is used to determine potential oil trend reversal oil signals.

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

Oil Trading Trend reversal - identified by a classic bearish divergence

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

Oil Trading Trend reversal - identified by a classic bullish divergence

Oversold/Overbought Levels on Indicator

Stochastic is mainly used to identify potential overbought & over-sold conditions in crude oil price movements.

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

Overbought - Values Greater 70

• Over-sold values less than 30 level - a buy oil signal is generated when the oscillator goes below 30% and 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 oil market is trending upward or downwards.