Stochastic Oscillator

Stochastic Oscillator

Stochastic Oscillator is a movement indicator used to find out support and resistance of a market. It is similar to RSI (relative strength index ) so is used to detect if a commodity Is over brought or oversold.  The indicator tends to use two lines, the K line and the D line. The K-line represents the strength index and the D line is the simple moving average of the K-line. In one statement,  stochastic oscillator compares where a security’s price closed relative to its price range over a given time period.

Interpreting stochastic oscillator

The indicator oscillates between 0 and 100, with the globally accepted important levels being 20 to 80. You can select your own support and resistance lines that asuit your system.  When the K and D line are over 50 this is classified as a bullish market/trend, and vice versa, when the K and D line are under 50 this is categories as a bearish market/trend.

Text book definition

When the K line rises above the D line and sell when the K line falls below the D line.

Buy signal

A buy signal occurs when the K-line raises above the D line and breaks through the support level of 20. This shows that an upward trend has the potential of forming. Like all indicators, this may be a false signal. Hence why some traders set their support level to 30 r even 40 so that they can be in the trend during the bullish market. As a trade, you should always use multiple different forms of indicators to ensure the occurrence of a trend. For example, you could look for divergences where prices are making a series of new highs and the Stochastic Oscillator is failing to surpass its previous highs. This would provide you with a better buy signal than simply buying when K is higher than D.

Sell signal

A sell signal occurs when R falls below D and when the R and D fall below the resistance level of 80.

Narrow bottoms and tops

When the stochastic forms a narrow bottom, this indicates that there is a weakness in the bearish market. Arrow bottoms tend to signify a break out or reversal to the bullish trend. This not always the case but is something you should look out for. This is also the case for bullish markets when a narrow top occurs. Remember that there are patterns in the market that may turn this signal into a fake signal, for example double tops and double bottoms. Where the commodity highs a new high, drops down then reaches that previous reached high again.  

Written by James Ogunsanwo