| The Stochastic Oscillator is an overbought/oversold | | | | Whether fast or slow and whether period you use, |
| indicator developed by Dr. George Lane. The | | | | the important buy/sell signals from stochastic are as |
| stochastic is a common indicator that is integrated | | | | follows. |
| into every charting software including MetaStock. | | | | 1. The SI around 75% to 80% indicates that a top is |
| Put simply, the Stochastic Indicator (SI) is a price | | | | imminent (overbought). |
| oscillator which compares today's price to its price | | | | 2. The SI around 25% to 20% is often an imminent |
| range over a specific period of time. For example a | | | | sigh of a bottom (oversold). |
| 14-day SI, compares a derivative of today's price | | | | 3. Buy when SI is in oversold zone and the faster |
| with price 14 trading days ago. We will not go deep | | | | %K line crossed above the slower %D line. |
| to the actual calculation here. Believe me! you will be | | | | 4. Sell when SI is in overbought zone and the %K |
| glad that we do not. In an uptrend, the price usually | | | | crosses the %D to the downside. |
| moves to the upper end of the recent price range. In | | | | 5. Look for divergences, it tells you that the price is |
| a downtrend, the price sinks to the bottom of the | | | | going to reverse. If price makes a new high and at |
| range. | | | | the same time that the stochastic makes lower high. |
| Stochastic Indicator is displayed in two lines; the | | | | This is called a "bearish divergence". The "bullish |
| major line is called %K (usually displayed in solid) and | | | | divergence" is when the price makes a new low while |
| the %D (usually displayed in dotted line) as a 3-day | | | | the stochastic makes higher low. |
| moving average of %K. There are two forms of | | | | Many traders use stochastic indicator as stand-alone |
| stochastic, fast stochastic and slow stochastic. The | | | | system. Although there is nothing wrong with this |
| one mentioned earlier is fast stochastic. The slow | | | | approach. I would suggest you to use it with others |
| stochastic is a smoothed version of fast stochastic. | | | | indicators or chart patterns to confirm the signal. |
| It usually moves more gradually. | | | | Every indicator and method has its pros and cons. |
| According to the strong correlation between tops | | | | Use it to support each others. Do not take |
| and bottoms in price and SI tops and bottoms, the | | | | unnecessary risks; watch out for signals from your |
| SI, therefore, is a powerful indicator and used-widely | | | | trading system. If all indicators are in gear, it is the |
| in short-term trading or day trading. | | | | stronger and safer signal for you to enter a trade. |
| How to apply Stochastic Indicator in Trading? | | | | |