Stochastic Oscillator Indices Technical Analysis and Stochastic Oscillator Trading Signals

Developed by George C. Lane

The Stochastic Oscillator is a momentum indicator - it shows the relation between the current closing stock indices trading 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 indices trend market the stock indices trading price closes near the high of the stock indices trading price range and in a downward trending market the stock indices trading price will close near the low of the stock indices trading 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 Indices Oscillators: Fast, Slow and Full Stochastics

There are Three types are: fast, slow and full Stochastic. The 3 indicators look at a given chart period for examples the 14-day period, and measures how the stock indices trading 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 indices trend, stock indices trading price tends to close at the high of the candlestick.
• In a downwards indices trend, stock indices trading price tends to close at the low of the candlestick.

This stock indices indicator shows the momentum of the Indices trends, and identifies the times when a market is overbought or oversold.

Stock Indices Technical Analysis & How to Generate Signals

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

Stock Indices Trading Crossover Trading Signals

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

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

50-level Crossover:

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

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

Divergence Stock Indices Trading

Stochastic is also used to look for divergences between this indicator and the indices trading price.

This is used to determine potential indices trend reversal stock indices trade signals.

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

Indices Trend reversal - identified by a classic bearish divergence

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

Indices Trend reversal - identified by a classic bullish divergence

Overbought/Oversold Levels on Indicator

Stochastic is mainly used to identify potential overbought & over-sold conditions in stock indices trading price movements.

• Over-bought values greater than 70 level - A sell stock indices 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 stock indices 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 stock indices trading market is trending upward or downward.