The Stochastic oscillator is a momentum indicator to compare the final price of a product to its price range in a given time span. The idea behind this indicator is the prices tend to close near their recent high in bull markets, and near its minimum in Bear markets. Transaction signals can be spotted when the stochastic oscillator goes moving average.
Two Stochastic Oscillator indicators are typically calculated to assess future variations in prices, fast (% K) and slow (% d). Comparison of these figures are a good indication of the speed with which prices are changing or hit by price
two Stochastics lines .:
There are two well-known methods of using the% K and% D refer to decisions about when to buy or sell shares. The first involves crossing% K and% D signal, the second involves building buy and sell decisions on the assumption that the% K and% D fluctuate.
In the first case,% D acts as a trigger or signal line for% K. A buy signal is given when the% K passes through the% D, or sell signal when it goes down through% D. Such crossovers can occur too often, and to prevent repeated whipsaw person can ask for crossovers come along overbought / oversold followed, or only after the maximum or minimum of% D line. If fluctuations in the price is high, a simple moving average Stoch% D indicator may be taken. This figure smoothes out rapid fluctuations in price.
Second, argue some analysts that the% K or% D levels above 80 and below 20 can be interpreted as overbought or oversold. It is recommended to buy and sell timed to return back from these thresholds. In other words, one should buy or sell after a transition. Practically, this means that when the price exceeds one of these thresholds, the investor should wait for the price to go back through the thresholds (eg oscillator were going over 80, the investor waits until it falls below 80 to sell). In currencies we use mainly the stochastic oscillator on the 15 and 60 minute charts.
use Stochastics in trend market
key is when the market is trending up, we will look oversold conditions (when Stochastics covered oversold level (under 20) and rises back above the same level) to get ready to trade, and in the same way, when the market is trending down we will only look overbought conditions (when Stochastics rise above de overbought level (over 80) and falls back to the same level.
Use Stochastic in Trend-less market