Stochastic Oscillator Stocks Technical Analysis and 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 and 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 stocks trend market the stocks price closes near the high of the stocks price range and in a downward trending market the stocks price will close near the low of the stocks 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 Stock Trading Oscillators: Fast, Slow and Full Stochastics
There are 3 types are: fast, slow and full Stochastic. The three indicators look at a given chart period for example the 14-day period, and 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, and identifies the times when a market is overbought or oversold.
Stocks Technical Analysis and Generating Stocks Signals
The most common techniques used for technical analysis of Stochastic Oscillators to generate stock trading signals are crossovers signals, divergence signals and overbought oversold levels. The following are the methods used for generating trade signals
Stock Trading Crossover Stocks Trading Signals
Buy signal- %K line crosses above the %D line (both lines moving up)
Sell signal- %K line crosses below the %D line (both lines moving down)
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 and the stocks price.
This is used to determine potential stocks trend reversal signals.
Upward/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 Stocks Trading Indicator
Stochastic is mainly used to identify potential overbought and oversold conditions in stocks 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% 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 trading market is trending upwards or downwards.
