Stochastic Oscillator Technical Analysis and Stochastic Oscillator Technical Signals
Developed by George C. Lane
Stochastic Oscillator Technical Indicator is a momentum technical indicator - it shows the relation between the current closing price compared to the high and low range over a given number of n periods. The Oscillator Technical uses a scale of 0-100 to plot its values.
This Oscillator is based on the theory that in an uptrend market the price closes near high of price range & in a downwards trending market the price will close near the low of the 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 Indicators: Fast, Slow & Full Stochastics
There are 3 types are: fast, slow & full Stochastic. The 3 technical indicators look at a given chart period for example 14 day period, and gauges how the price of today's close compares and analyzes to the high and low range of time period that's being used to calculate the stochastic oscillator.
This oscillator trading works on the principle that:
- In an uptrend, price often tends to close at the high of stick.
- In a downtrend, price tends to close at the low of candle.
This indicator shows the energy of the Forex trends, and identifies the times when a market is over-bought or oversold.
Forex Technical Analysis & Generating Signals
Most common techniques used for analysis of Stochastic Oscillators to generate Forex signals are cross overs signals, divergence signals & over bought over-sold areas. The following are the techniques and methods used for generating trade signals
FX Cross-over Signals
Buy signal - Percentage K line crosses above %D line (both lines moving upwards)
Sell trading signal - %K line crosses below the %D line (both lines heading downwards)
50-level Crossover:
Buy signal - when stochastics indicator lines cross above 50 mark a buy trading signal is generated.
Sell trading signal - when stochastic trading indicator lines cross below 50 mark a sell trading signal is generated.
FX Divergence Trading
Stochastic is also used to look for divergences between this trading indicator & the price.
This is used to determine potential trend reversal signal.
Upward/rising trend reversal - identified by classic bearish divergence
Trend reversal - identified by a classic bearish divergence
Downwards trend reversal - identified by a classic bullish divergence
Trend reversal - identified by a classic bullish divergence
Over-bought/Oversold Levels on Trading Indicator
Stochastic is mainly used to identify the potential overbought & oversold conditions in price movements.
- Overbought values greater than 70 level - A sell signal forms when the oscillator rises above 70% & then falls below this technical level.
Overbought - Values Greater 70
- Oversold values less than 30 level - a buy signal is derived & generated when the oscillator goes below 30% & then rises above this technical level.
Over-sold - Values Less Than 30
Trades are derived and generated when Stochastic Oscillator Technical Indicator crosses these levels. However, overbought/oversold levels are prone to whipsaws especially when market is trending upwards or downward.
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