| As we discussed in Part 1 of this series, by now you | | | | The stochastic is one very popular oscillator that |
| should have a determined trends for the stocks you | | | | actually has two different lines on its chart. These |
| are watching. Now we will start to examine the | | | | are known as the fast and slow stochastic lines. It |
| waves of its price action. Regardless of whether the | | | | bases its signal on price action over a certain number |
| trend of a stock is going up or down, it will always | | | | of trading days known as periods. You will have to |
| move in waves. It will always swing up and down on | | | | enter the period you wish to use. Most traders use a |
| a short term basis. And it is this back and forth | | | | period of 14 and follow the slow stochastic line. |
| motion that will help us hone in on when is the most | | | | When the slow line falls below 20, the stock is |
| advantageous time to make our move. | | | | considered to be oversold and represents potential |
| Of course, while it is good practice, you should not | | | | buying opportunity. When slow line rises above 80, it |
| rely totally on your eyes when it comes to nailing | | | | indicates an overbought situation and you should be |
| down what the price wave is precisely doing at on | | | | looking to sell. |
| given time. It should be quantified by using an | | | | Here is a word of caution when using the stochastic |
| indicator. This is where a good oscillator comes in | | | | line. If you want to add a degree of safety, you wait |
| handy. Oscillators measure the swing motions that all | | | | for the line to turn back up or down before buying |
| stocks exhibit. They are generally placed at the | | | | or selling. In other words, do not buy because the |
| bottom of your price chart and have a little chart of | | | | slow line fell below 20. Instead, wait for it to turn |
| their own that depicts the back and forth price | | | | back up or even to cross above 20 again before |
| motion. By viewing the chart of the oscillator, you will | | | | buying. The reason for this is that these lines can |
| get an idea of when to consider jumping into a stock | | | | move sideways for prolonged periods of time. |
| position. | | | | |