The premier source for building smart traders
The Stochastic Oscillating Indicator
The stochastic oscillator is not a normalized relative strength indicator, like most other momentum oscillators. It compares the price of a tradable to its price range over a period of time. It tells you where the current closing price is relative to the recent range of the tradable.
I didn't include a chart with this descriptive narrative, as I merely wanted to stress the proper use of this particular indicator ...
The most important thing to note about this indicator is the original intention behind it. Originally, George Lane, its creator, opined that divergence was the only valid signal on which to trade. As Lane first presented stochastics, a valid signal occurred only when a divergence between price and stochastics was followed by a crossing of the %K and %D lines. Please get this concept down, as you need to use this indictor as it was originally designed. I can admit to using it improperly, until I came across the above description of its intended use by its originator.
First introduced by George Lane in the 1970s, the stochastic oscillator was designed to indicate when a market becomes overbought or oversold within a trading range. The indicator produces readings between zero and 100. As initially proposed, readings over 70 indicate an overbought market. The term overbought describes a situation in which the market has run up quickly due to an influx of buyers. Eventually, the market reaches a price level high enough that traders feel uncomfortable buying. Then, as sellers enter the market to take profits, prices start to fall.
That decline may be short-lived, and an upward trend might resume, or the recent peak might represent a top and much lower prices might be ahead. In that case, a move below 30 indicates an oversold situation. The expectations of a rally after reaching oversold levels are based on the same circumstances as the overbought, except the conditions are reversed; it is a situation in which the market falls precipitously due to an influx of sellers. All of this is viewed as the normal ebb and flow of the market as it moves from one extreme to another.
Market peaks and bottoms are coincident with readings of above the 70 to 80 level for the market tops, and below the 20 to 30 level for the bottoms.
The stochastic indicator is made up of two lines: The red solid %K line, the faster line, uses a five-day range with no slowing. The blue broken %D (signal) line, the slower line, is a three-day simple moving average of %K, the faster line. The two black horizontal lines at values 80 and 20 identify overbought and oversold levels.
HOW IT WORKS …
Stochastics is based on the relative position of a security's closing price within the trading range during past periods. Generally, during a market downtrend, the closing price tends to be at the low end of the trading range over a selected period. Conversely, during uptrends, the close tends to be at the upper end of the trading range.
The relative position of the close in the range during market transitions is also significant. As a market nears the end of a downtrend and is reversing, closing prices shift from the lower part of the range to the higher part of the range.
The reverse is true at market tops. The close shifts from the upper part of the range to the lower. Stochastics measures and represents this relationship between the close and the range.
Originally, Lane opined that divergence was the only valid signal on which to trade. Two other criteria were used to confirm divergence, or as a warning that an important signal was near. They were: the position of the lines relative to each other, and the lines relative to specific levels (80 and 20). As Lane first presented stochastics, a valid signal occurred only when a divergence between price and stochastics was followed by a crossing of the %K and %D lines.
HOW DIVERGENCE WORKS
Divergences reveal much about price movements. When prices continue moving up, but the stochastic oscillator doesn't, this is called a negative divergence. When you see happen, it usually means that a downtrend in prices is likely to take place. Likewise, when prices are moving down, but the stochastic oscillator doesn't follow price movement, it usually means that prices will rise.
By now, you should realize that the stochastic oscillator is useful in identifying oversold and overbought levels, and in determining turning points in prices. The value of this oscillator obviously changes from trading session to trading session, thereby issuing false signals at times. Accordingly, this oscillator should be used in conjunction with other indicators.
Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of commodity trading rules, a currency trading strategy, or stock market successful trading strategies. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!
Shows you how FAST you can make money when the BIG DOGS make their move - by shamelessly copying this winning group . Even I am STILL surprised by how much power they have over ALL markets - not just commodities futures, currencies, and stocks.
When it comes to commodity trading rules, a currency trading strategy, or stock market successful trading strategies, you will find a whole lot more in my internationally acclaimed book ...
With a few simple mouse clicks ...
"Free" unlimited personal consultation with each purchase
"No-Games, No-Strings" Money Back Guarantee
Over 76% of our customers have been trading four years or more. Almost 24% have been at it for over 20. Even experienced traders know they have more to learn. No matter what market you're in, whether your preference is commodities, currencies, futures, options, stocks, mutual funds, intraday or inter-day, whether you're a beginner who needs a concrete plan or a seasoned trader, or simply looking for information on how to use commitments of traders data, you've come to the right place. Most traders who come to us just want to know how to trade commodities futures, currencies, and stocks against the 'dumb money,' and ...
How To Make A Full-Time Income Trading Less Than Part Time
Have a day job; can't watch the markets; want to trade?
Want to see intraday real-time stock charts for free?
Want to learn how to daytrade in 11 easy steps?
Want to trade without paying commissions?
Want to get paid for your stock picks?
Read on ...
Find out what a blind, three-legged dog with a note tied
around its neck could do, even in a market jumping
up and down like a kangaroo on speed ...
Find out how the "Big Dogs" got rich and what
they are hiding from you ...
Find out what only 10% of traders know ...
Stop trading with your eyes closed ...
FAQ | Guarantee | Order | Other Resources | Fund One | Contact Us | Kudos | MACD| Rules | 3Days |
RR | Commodities | Stocks | 4 % Rule | Currencies | Exposed | COT | Ideas | Advice | Big Dogs
Content | Mission | Trading | Software | Dumb Money | Smart Money | Order Types | FYI
Indicators | 7Habits | 2Truths | SM Indicator | Glossary | Swing Trade | Pivots | Gaps
Monthly Newsletter: Stocks, Commodities Futures, Currencies, and Markets
Stock Market Successful Trading Strategies | Commodities Investment Research
Free Investment Advice Expert | Stock Market Investing Basics
Day Trading Stock Pick Tips | Beginner in Trading Stocks
Currency Trading Strategy | Commodity Trading Rules
Commitments of Traders | Free Day Trading Tips
TradingSmarts Smart Links
TradingSmarts Smart Watch
Over 76% of our readers have been trading four years or more, while almost 24% have been at it for over 20. Even experienced traders know they have more to learn.
Find out what a blind, three-legged dog with a note tied around its neck could do, even in a market jumping up and down like a kangaroo on speed ...
Find out how the "Big Dogs" got rich and what they are hiding from you ...
Find out what only 10% of traders know ...