Stochastic Indicator Crossover Signals
A third way to interpret the signals provided by the Stochastic indicator is similar to a moving average crossover. In the Stochastic case, a crossover signal happens when the %K and %D lines crossover. These signals should be taken with scrutiny as, out of the three interpretations discussed so far, they produce the most whipsaws. False signals are especially common in the Fast Stochastic version.
- For a Sell, one looks for the %K line to move below the %D line.
- For a Buy, one looks for the %K line to move above the %D line.
Since crossovers of %K and %D are often unreliable, they should be verified with other indicators.
The center-line lies at the 50% level in the indicator panel. It implies that there is a balance between bulls and bears. Situations when the indicator crosses the center-line can give an insight into whether the buyers or sellers will begin to control market conditions.
- If the indicator is staying below the center-mark (between 40%-50%) and crosses up, then it is an indication that the bulls are taking control of the market.
- If the indicator is staying above the center-mark (around 50%-60%) and then crosses below the center-mark, it can be an indication that the bears have taken control.