Stochastic Oscillator Trading Analysis and Stochastic Oscillator Signals

Created 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 & Full Stochastics

There are Three types are: fast, slow and 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.

Analysis and How to Generate Signals

Most common techniques used for analysis of Stochastic Oscillators to generate signals are cross-overs signals, divergence signals and 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 Cross over:

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 technical 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 and 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 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.