Stochastic Oscillator Stocks Technical Analysis & Stochastic Oscillator Stocks Signals

Developed by George C. Lane

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

This Oscillator is based on the theory that in an up stocks trend market the stocks price closes near the high of the stocks price range & in a downwards trending market the stocks price will close near the low of the stocks 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 Oscillators: Fast, Slow & Full Stochastics

There are 3 types are: fast, slow & full Stochastic. 3 indicators look at a given chart period for example the 14-day period, & measures how the stocks 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 stocks trend, stocks price tends to close at the high of the candlestick.
• In a downward stocks trend, stocks price tends to close at the low of the candlestick.

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

Stocks Technical Analysis and Generating Stocks Signals

The most common techniques used for analysis of Stochastic Oscillators to generate stock signals are cross-overs signals, divergence signals and over bought over-sold areas. Following are the methods used for generating trade signals

Stock Trading Crossover Trading Signals

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

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

50-level Crossover:

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

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

Divergence Stock

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

This is used to determine potential stocks trend reversal signals.

Upwards/rising stocks trend reversal- identified by a classic bearish divergence

Stocks Trend reversal - identified by a classic bearish divergence

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

Stocks Trend reversal - identified by a classic bullish divergence

Oversold/Overbought Levels on Indicator

Stochastic is mainly used to identify potential overbought and over-sold conditions in stocks price movements.

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

Overbought - Values Greater 70

• Over-sold values less than 30 level - a buy signal is generated when 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 stock market is trending upward or downwards.