Crossovers

A third way to interpret the signals provided by the Stochastic indicator is similar to a moving average crossover. In the Stochastic case, a crossover signal happens when the %K and %D lines cross. These signals should be taken with scrutiny as, out of the three interpretations discussed so far, they produce the most whipsaws. False signals are especially common in the Fast Stochastic version.

Crossover Signals:

• For a Sell, one looks for the %K line to cross below the %D line.
• For a Buy, one looks for the %K line to cross above the %D line.
• Since crossovers of %K and %D are often unreliable, they should be verified with other indicators.

The Centerline

The centerline lies at the 50% level in the indicater panel. It implies that there is a balance between bulls and bears. Situations when the Stochastic indicator crosses the centerline can give an insight into whether the buyers or sellers will begin to control market conditions.

Centerline Crossovers

• If the indicator is staying below the centerline (between 40%-50%) and crosses up, then it is an indication that the bulls are taking control of the market.
• If the indicator is staying above the centerline (around 50%-60%) and then crosses below the centerline, it can be an indication that the bears have taken control.

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