Stochastic Oscillator Trading Analysis & Stochastic Oscillator Trading Indicator Signals
Developed by George C. Lane
The Stochastic Oscillator Trading is a momentum technical indicator - it shows the relation between the current closing price relative to the high & low range over a given number of n periods. The Oscillator Trading Indicator uses a scale of 0-100 to draw its values.
This Oscillator is based on the theory that in an up trend market the price closes near high of price range & in a downward trending market the price will close near the low of 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 Oscillators: Fast, Slow & Full Stochastics
There are three types are: fast, slow and full Stochastic. 3 indicators look at a given chart period for example 14 day period, and measures how the price of today's close compares to the high & low range of time period that is being used to calculate the stochastic.
This oscillator technical works on the principle that:
- In an upwards trend, price oftenly tends to close at the high of candlestick.
- In a downward trend, price tends to close at the low of candlestick.
This indicator shows the momentum of the trends, and identifies the times when a market is over-bought or over-sold.
Technical Analysis and How to Generate Signals
Most common techniques used for analysis of Stochastic Oscillators to generate signals are cross overs signals, divergence signals & overbought over-sold levels. The following are the techniques used for generating signals
XAUUSD Cross Over Trade Signals
Buy signal - %K line crosses above the %D line (both lines heading up)
Sell trade signal - %K line crosses below %D line (both lines heading down)
50-level Cross over:
Buy signal - when stochastics indicator lines cross above 50 mark a buy signal is generated.
Sell signal - when stochastic lines cross below 50 a sell signal is generated.
Divergence XAUUSD
Stochastic is also used to look for divergences between this technical indicator & the price.
This is used to determine potential trend reversal signal setup.
Upwards/rising trend reversal - identified by a classic bearish divergence
Trend reversal - identified by a classic bearish divergence
Downward/descending trend reversal - identified by a classic bullish divergence
Trend reversal - identified by a classic bullish divergence
Over-sold/Overbought Levels on Indicator
Stochastic is mainly used to identify potential overbought and oversold conditions in 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 oscillator goes below 30% and then rises above this level.
Oversold - Values Less Than 30
Trade Signals are generated when Stochastic Oscillator Trading Indicator Trading crosses these levels. However, overbought/oversold levels are prone to whip-saws especially when market is trending upwards or downwards.
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