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| Tip #4 - About Technical Analysis |
3. Stochastic Oscillator
The stochastic Oscillator is another momentum indicator that tracks the closing prices,
whether it will close high or close low for the day for a period of time. The objective of
the stochastic indicator is to identify possible trend reversal based on the belief that
when the closing levels are consistently near to the low, it indicates that the stock is
under selling pressure. It may be bottoming out and a trend reversal is at hand. When
the closing levels are near to the high, the process is reversed.
There are two major types of stochastic oscillators: Fast and Slow. The fast stochastic is
more sensitive and thus, more likely to be subject to whipsaws (false signals). In this
section, we will focus on the slow stochastic.
There are two lines: percent D (%D) and percent K (%K) lines. The %D line is the slower
of the two. It is derived by applying a 3-day simple moving average to the %K line.
While the %D line is represented by the red line or the signal line, the %K line is
represented by the blue line.
In addition, the stochastic oscillator has a range of 0 to 100. This piece of data gives out
‘over bought’ and ‘over sold’ signals. Above 80 is considered ‘over bought’ and below
20 is classified as ‘over sold’.
Buy Signal
A buy signal is triggered when the %K line (blue) is above the %D line (red). A more
significant crossover will be when %K crosses the %D line from the right hand side of
the trough. Moreover, make sure the lines are in the “over sold” range, as this will
greatly enhance a strong rebound for the stock.
Sell Signal
A sell signal is triggered when the %K line (blue) is below the %D line (red). A more
significant crossover will be when %K crosses the %D line from the right hand side of
the peak. Beware if the lines are in the ‘over bought’ range, its time to sell your stock.
To know more about technical analysis, please refer to www.stockcharts.com
The stochastic Oscillator is another momentum indicator that tracks the closing prices,
whether it will close high or close low for the day for a period of time. The objective of
the stochastic indicator is to identify possible trend reversal based on the belief that
when the closing levels are consistently near to the low, it indicates that the stock is
under selling pressure. It may be bottoming out and a trend reversal is at hand. When
the closing levels are near to the high, the process is reversed.
There are two major types of stochastic oscillators: Fast and Slow. The fast stochastic is
more sensitive and thus, more likely to be subject to whipsaws (false signals). In this
section, we will focus on the slow stochastic.
There are two lines: percent D (%D) and percent K (%K) lines. The %D line is the slower
of the two. It is derived by applying a 3-day simple moving average to the %K line.
While the %D line is represented by the red line or the signal line, the %K line is
represented by the blue line.
In addition, the stochastic oscillator has a range of 0 to 100. This piece of data gives out
‘over bought’ and ‘over sold’ signals. Above 80 is considered ‘over bought’ and below
20 is classified as ‘over sold’.
Buy Signal
A buy signal is triggered when the %K line (blue) is above the %D line (red). A more
significant crossover will be when %K crosses the %D line from the right hand side of
the trough. Moreover, make sure the lines are in the “over sold” range, as this will
greatly enhance a strong rebound for the stock.
Sell Signal
A sell signal is triggered when the %K line (blue) is below the %D line (red). A more
significant crossover will be when %K crosses the %D line from the right hand side of
the peak. Beware if the lines are in the ‘over bought’ range, its time to sell your stock.
To know more about technical analysis, please refer to www.stockcharts.com
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