History of the Stochastic Oscillator The stochastic oscillator was developed in the late s by George Lane.
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The stock formed a lower high as the Stochastic Oscillator forged a higher high.
Combining the Stochastic with other tools As with any other trading concept or tool, you should not use the Stochastic indicator by itself. To receive meaningful signals and improve the quality of your trades, you can combine the Stochastic indicator with those 3 tools: Moving averages can be a great addition here and they act as filters for your signals. Always trade in the direction of your moving averages and as long as price is above the moving average, only look for longs — and vice versa.
More importantly, this article is meant to make you realize how little you might know about the tools you use for your trading. Additionally, there is a lot of wrong knowledge being shared among traders and even widely used tools such as the Stochastic indicator is often misinterpreted by the majority of traders. Do not blindly believe what other people tell you, do your own research and build your trading knowledge.
Moves above 80 warn of overbought conditions that could foreshadow a decline. Notice how the oscillator can move above 80 and remain above 80 orange highlights. Similarly, the oscillator moved below 20 and sometimes remained below The indicator is both overbought AND strong when above A subsequent move below 80 is needed to signal some sort of reversal or failure at resistance red dotted lines.
Conversely, the oscillator is both oversold and weak when below A move above 20 is needed to show an actual upturn and successful support test green dotted lines. The Full Stochastic Oscillator 20,5,5 was used to identify oversold readings.
Overbought readings were ignored because the bigger trend was up. Trading in the direction of the bigger trend improves the odds. Subsequent moves back above 20 signaled an upturn in prices green dotted line and continuation of the bigger uptrend. With a downtrend in force, the Full Stochastic Oscillator 10,3,3 was used to identify overbought readings to foreshadow a potential reversal. Oversold readings were ignored because of the bigger downtrend.
The shorter look-back period 10 versus 14 increases the sensitivity of the oscillator for more overbought readings. For reference, the Full Stochastic Oscillator 20,5,5 is also shown. Notice that this less sensitive version did not become overbought in August, September, and October. It is sometimes necessary to increase sensitivity to generate signals.
Bull Bear Divergences Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a higher low. This shows less downside momentum that could foreshadow a bullish reversal. A bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a lower high. This shows less upside momentum that could foreshadow a bearish reversal.
Once a divergence takes hold, chartists should look for a confirmation to signal an actual reversal. A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline.
Think of it as the yard line in football. The offense has a higher chance of scoring when it crosses the yard line. The defense has an edge as long as it prevents the offense from crossing the yard line. A Stochastic Oscillator cross above 50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below 50 means that prices are trading in the bottom half of the given look-back period.
This suggests that the cup is half empty. Notice how the stock moved to a new low, but the Stochastic Oscillator formed a higher low. There are three steps to confirming this higher low. This provides the earliest entry possible. The second is a move above 50, which puts prices in the upper half of the Stochastic range. The third is a resistance breakout on the price chart. Notice how the Stochastic Oscillator moved above 50 in late March and remained above 50 until late May. The stock moved to higher highs in early and late April, but the Stochastic Oscillator peaked in late March and formed lower highs.
The signal line crosses and moves below 80 did not provide good early signals in this case because KSS kept moving higher. The Stochastic Oscillator moved below 50 for the second signal and the stock broke support for the third signal.
As KSS shows, early signals are not always clean and simple. Signal line crosses, moves below 80, and moves above 20 are frequent and prone to whipsaw. Even after KSS broke support and the Stochastic Oscillator moved below 50, the stock bounced back above 57 and the Stochastic Oscillator bounced back above 50 before the stock continued sharply lower. Bull Bear Set-ups George Lane identified another form of divergence to predict bottoms or tops.
A bull set-up is basically the inverse of a bullish divergence. The underlying security forms a lower high, but the Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high, the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next decline is then expected to result in a tradable bottom. The stock formed a lower high as the Stochastic Oscillator forged a higher high. This higher high shows strength in upside momentum.
Remember that this is a set-up, not a signal. The set-up foreshadows a tradable low in the near future. Traders could have acted when the Stochastic Oscillator moved above its signal line, above 20 or above Alternatively, NTAP subsequently broke resistance with a strong move.
A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a lower low. Even though the stock held above its prior low, the lower low in the Stochastic Oscillator shows increasing downside momentum. The next advance is expected to result in an important peak. The stock formed a higher low in late-November and early December, but the Stochastic Oscillator formed a lower low with a move below This showed strong downside momentum.
The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.
The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic Oscillator (chart 2). In technical analysis of securities trading, the stochastic oscillator is a momentum indicator that uses support and resistance levels. Dr. George Lane developed this indicator in the late s. The term stochastic refers to the point of a current price in relation to its price range over a period of time.
How to interpret Stochastic indicator. Stochastic is a momentum oscillator, which consists of two lines: %K - fast line, and %D - slow line. Stochastic is plotted on the scale between 1 and There are also so called "trigger levels" that are added to the Stochastic chart at 20 and 80 levels. Stochastics is a favorite indicator of some technicians because of the accuracy of its findings. It is easily perceived both by seasoned veterans and new technicians, and it .
Stochastic is a simple momentum oscillator developed by George C. Lane in the late ’s. Be ing a momentum oscillator, Stochastic can help determine when a currency pair is overbought or oversold. The Stochastic oscillator is another forex chart analysis indicator that helps us determine where a trend might be ending. This simple momentum oscillator was created by George Lane in the late s.