Stochastic Oscillator Trading Analysis and Stochastic Oscillator Trading Signals

Developed by George C. Lane

The Stochastic Oscillator is a momentum indicator - it shows the relation between the current closing xauusd price relative to the high and 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 the high of the price range and 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 Gold Trading Oscillators: Fast, Slow and Full Stochastics

There are Three types are: fast, slow and full Stochastic. The three indicators look at a given chart period for examples the 14-day period, and measures how the price of today’s close compares to the high/low range of the time period that's being used to calculate the stochastic.

This oscillator works on the principle that:

• In an upwards trend, xauusd price tends to close at the high of the candlestick.
• In a downwards trend, xauusd price tends to close at the low of the candlestick.

This indicator shows the momentum of the trends, & identifies the times when a market is overbought or oversold.

Trading Analysis & How to Generate Trading Signals

The most common techniques used for analysis of Stochastic Oscillators to generate signals are cross-overs trading signals, divergence signals & overbought oversold levels. Following are the methods used for generating trade signals

XAUUSD Trading 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 stochastic lines cross above 50 a buy trading signal is generated.

Sell signal - when stochastic lines cross below 50 a sell signal is generated.

Divergence XAUUSD Trading

Stochastic is also used to look for divergences between this indicator and 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 is generated when the oscillator goes below 30% & 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 market is trending upward or downward.