Stochastic Oscillator Analysis & Stochastic Oscillator Signals

Developed by George C. Lane

The Stochastic Oscillator 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. The 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 stocks price closes near the high of the stocks price range & in a downward trending market the stocks price will close near the low of the stocks price range.

The Stochastic Lines are drawn as 2 lines- %K & %D.

• Fast line %K is the main
• Slow line %D is the signal

3 Types of Stochastics Oscillators: Fast, Slow & Full Stochastics

There are Three types are: fast, slow & full Stochastic. Three indicators look at a given chart period for example the 14-day period, and measures how the stocks 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 trend, stocks price tends to close at the high of the candlestick.
• In a downwards trend, stocks price tends to close at the low of the candlestick.

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

Trading Analysis & Generating Signals

The most common techniques used for technical analysis of Stochastic Oscillators to generate signals are cross overs signals, divergence signals and over bought oversold areas. The following are the techniques used for generating trade signals

Stock Cross-over Trade Signals

Buy signal - % K line crosses above %D line (both lines moving up)

Sell signal - %K line crosses below %D line (both lines moving down)

50-level Crossover:

Buy signal - when stochastic lines cross above 50 a buy trade signal is generated.

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

Divergence Stocks Trading

Stochastic is also used to look for divergences between this indicator & the price.

This is used to determine potential trend reversal stock trade signals.

Upward/rising trend reversal- identified by a classic bearish divergence

Stock Trend reversal - identified by a classic bearish divergence

Downwards/descending trend reversal- identified by a classic bullish divergence

Stock Trend reversal - identified by a classic bullish divergence

Overbought/Oversold Levels on Technical Indicator

Stochastic is mainly used to identify potential overbought & oversold conditions in price movements.

• Overbought values greater than 70 level - A sell stock 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 signal is generated when the oscillator goes below 30% and then rises above this level.

Oversold - Values Less Than 30

Trades are generated when Stochastic Oscillator crosses these levels. However, overbought/oversold levels are prone to whipsaws especially when the market is trending upward or downwards.