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As mentioned before, Stochastic is one of most useful indicators used by traders. Most professional analyses will mention a Stochastic reading. As was demonstrated with the examples for Stochastic divergences, they can be a very handy tool to an intraday trader. We covered several interpetations of the Stochastic indicator, and summarize them below. It should be noted that it is better to use the signals from Stochastic when coupled with information from other technical indicators.
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Stochastic Summary |
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The Stochastic indicator is an oscillator that measures momentum. It is based on the idea that during an uptrend prices tend to close at the high of the candle, and during a downtrend at the low of the candle. |
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Trend Identification |
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Interpretation |
Description |
Results |
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1. Trend |
Stochastic heading up
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Price increasing
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2. Oscillation |
Stochastic reaches 80% level
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Overbought
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3. Tops |
Thin and Shallow
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Contraction will be strong
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4. Bottoms |
Thin and Shallow
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Rally will be strong
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Signals |
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1. Oscillation |
Stochastic crosses above, then below the 80% level.
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Sell setup or signal
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2. Negative Divergence |
Prices are setting higher highs while Stochastic is setting lower highs. |
Sell setup or signal |
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3. Positive Divergence |
Price level setting lower lows while Stochastic is setting higher lows. |
Buy setup or signal |
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4. Crossovers |
If %K line crosses below %D. |
Sell setup or signal |
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If %K line crosses above %D. |
Buy setup or signal |
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