Stochastic Oscillator Trading Analysis and Stochastic Oscillator Signals
Developed by George C. Lane
Stochastic Indicator is a momentum indicator - it shows the relation between the current closing price relative to the high & low range over a given number of n periods. Oscillator 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 and in a downwards 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 Trading Oscillators: Fast, Slow and Full Stochastics
There are Three types are: fast, slow & full Stochastic. The three indicators look at a given chart period for examples 14 day period, and measures how the price of today's close compares to the high & low range of time period that's being used to calculate the stochastic.
This oscillator works on the principle that:
- In an upwards trend, price often tends to close at the high of candlestick.
- In a downwards trend, price tends to close at the low of candlestick.
This indicator shows the momentum of the trends, & identifies the times when a market is overbought or oversold.
Trading 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 oversold levels. Following are the methods used for generating trade signals
XAUUSD Crossover Trade Signals
Buy signal - %K line crosses above %D line (both lines heading upwards)
Sell signal - %K line crosses below the %D line (both lines heading downwards)
50-level Crossover:
Buy signal - when stochastics indicator lines cross above 50 a buy signal gets generated.
Sell signal - when stochastic indicator lines move below 50 a sell signal gets generated.
Divergence XAUUSD Trading
Stochastic is also used to look for divergences between this indicator & the price.
This is used to determine potential trend reversal signals.
Upwards/rising trend reversal - identified by a classic bearish divergence
Gold Trend reversal - identified by a classic bearish divergence
Downwards/descending trend reversal - identified by a classic bullish divergence
Gold Trend reversal - identified by a classic bullish divergence
Overbought/Oversold Levels on Indicator
Stochastic is mainly used to identify potential overbought & oversold conditions in price movements.
- Overbought values greater than 70 level - A sell signal forms 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 gets generated when the oscillator goes below 30% & then rises above this level.
Oversold - Values Less Than 30
Trades are generated when the Stochastic crosses these levels. However, overbought/oversold levels are prone to whip-saws especially when market is trending upward or downward.