Stochastic Oscillator Stock Indices Technical Analysis and Stochastic Oscillator Stock Indices Signals
Developed by George C. Lane
The Stochastic Oscillator is a momentum indicator - it shows the relation between the current closing stock index 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 stock indices trend market the stock index price closes near the high of the stock index price range and in a downward trending market the stock index price will close near the low of the stock index 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: Fast, Slow and Full
There are 3 types are: fast, slow and full Stochastic. The three indicators look at a given chart period for example the 14-day period, and measures how the stock index 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 stock indices trend, stock index price tends to close at the high of the candlestick.
- In a downward stock indices trend, stock index price tends to close at the low of the candlestick.
This indicator shows the momentum of the Stock Indices trends, and identifies the times when a market is overbought or oversold.
Stock Indices Technical Analysis and Generating Stock Indices Signals
The most common techniques used for technical analysis of Stochastic Oscillators to generate stock index trading signals are crossovers signals, divergence signals and overbought oversold levels. The following are the methods used for generating trade signals
Buy signal- %K line crosses above the %D line (both lines moving up)
Sell signal- %K line crosses below the %D line (both lines moving down)
Buy signal - when stochastic lines cross above 50 a buy stock indices signal is generated.
Sell signal - when stochastic lines cross below 50 a sell stock indices signal is generated.
Divergence Stock Indices
Stochastic is also used to look for divergences between this indicator and the stock index price.
This is used to determine potential stock indices trend reversal stock indices signals.
Upward/rising stock indices trend reversal- identified by a classic bearish divergence
Stock Indices Trading Trend reversal - identified by a classic bearish divergence
Downward/descending stock indices trend reversal- identified by a classic bullish divergence
Stock Indices Trading Trend reversal - identified by a classic bullish divergence
Stochastic is mainly used to identify potential overbought and oversold conditions in stock index price movements.
- Overbought 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
- Oversold 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 the Stochastic Oscillator crosses these levels. However, overbought/oversold levels are prone to whipsaws especially when the stock index trading market is trending upwards or downwards.