The stochastic indicator is a momentum oscillator developed by
Its primary task is to highlight bullish or bearish divergence.
Bullish trade divergence occurs at the moment that a financial
asset exhibits a lower low at the same time when the
stochastic indicator reveals a higher low.
Since this is just a hint, traders must expect a direct signal.
2H chart AUD/JPY
A bullish divergence trade setup highlighted
by the stochastic indicator.
Notice the bullish divergence at the dark green spot.
If one buys at this point, one is trading the stochastic
indicator instead of the price.
It is crucial to wait for a valid signal ie: price is out of
the bearish channel (bullishly)
and it retests the channel. This is a bullish trade setup.
The next step will be a top down trading method.
It is the inverse of the bullish divergence.
This time, the stochastic indicator forms a weaker high at
the point when the price reveals a greater high.
The discrepancy is an indication that there is a high chance
that the financial security will decline.
JP Morgan Chase and Co stock, daily chart
The chart highlights a bearish stochastic indicator
The stochastic indicator shows a lower high at the same time
the price exhibits a greater high. Though, the warning came earlier,
the bearish setup was ready when the price failed to go above the
pink trend line at the red spot.
It is essential that financial market traders do not use these divergences
as a direct trading signal. One ought to consider them as trade setups
and consequently apply the trading drill.
Title: How To Use The Trading Drill Part 1
Description: The trading drill is about using a valid trade setup, signal and a low
risk entry point. Find out how to use the trading drill like a professional trader.
One will always use the stochastic indicator in conjunction with the trading
to improve day or swing trading.
Though, traders use different settings for the stochastic indicator,
the most effective are
1/ (8,3,3) and
Aside from the ultimate stochastic's use, market professionals also
use it to identify oversold and overbought price level.
This practice of utilizing the stochastic indicator has created cumulative
deformities in the financial markets. Many everyday traders and large
financial institutions have resorted to regular
misuse, but the default reason is the lack of knowledge.
If one develops a robotic trading system that buys at all oversold
stochastic and sells each overbought, one will misrepresent financial
securities. The single time such a trading system
will align with the market patterns is during the consolidation stage
or the edge of a declining or rising trend line.
Stochastic indicator oversold (real meaning)
If one is employing the stochastic indicator (8, 3, 3) and it shifts
oversold, it implies the price is at the deeper end of the spectrum
of the most current eight candlestick bars.
Conversely, whenever it is overbought, it purports that the prevailing
price is at the peak of the series of the most last eight candlestick bars.
It does not invariably mean that the asset is overbought or oversold.
Intel Corp stock, monthly chart
A chart depicting how the slow stochastic indicator (8,3,3) becomes
oversold each time the price is at the lower end of the range of the
last eight candlestick bars.
With the condition that the stochastic indicator (x, 3,3) is overbought
(above 75 or 80 level), it implies that the price has touched the leading
end of the scale of the most fresh x candlestick bars. It will be on the
cheaper edge if the oscillator is oversold.
Support and resistance
Quite often, the stochastic indicator is oversold
each time the price strikes a support level. In this occurrence, one may say that
the indicator is confirming the support levels.
Chevron Corporation (CVX) stock, weekly chart
at the time when the price pullbacks to a support level.
Likewise, the stochastic indicator recognizes resistance levels
each time it approaches the overbought level.
Weekly chart Euro/Japanese Yen (EUR/JPY)
A chart accentuating several overbought areas which coincide
Title: First Step To Mastering The Overbought Stochastic Indicator
Description: Know how to master the overbought stochastic indicator
Lane's momentum oscillator. Start mastering it.
Just when should one use the stochastic indicator?
Apart from its initial function as a divergence trading tool,
the stochastic indicator also enables day or swing trade
players to time their entries during a balanced market.
Since the price is restricted between two
levels (resistance and support), the indicator change into
overbought at the same period as the price reaches the resistance.
In this situation, traders will prioritize bearish signals.
Nonetheless, they will also shift their bearish strategy
as promptly as the stochastic indicator slips below 20 at the time
the price is also retesting the support.
Note that during the consolidation, the price is oscillating between
two critical levels.
Australian Dollar/Canadian Dollar (AUD/CAD) weekly chart
A balanced market (consolidation) is in place. Look for bearish
trade setups at the resistance above, and take bullish signals
at the support level.
Uptrend slow stochastic indicator strategy
To use the stochastic indicator during a bullish trend, one should
regularly use it in conjunction with a trend line, rising channel or
pitchfork tool. This suggestion will allow market
players to spot the best trade setups.
In a healthy bullish progress, the oscillator can stay overbought
for a lengthy period.
This phenomenon is normal during the third Elliott wave. Consequently,
bearish market players who sell every time it displays overbought can
quickly accumulate losses if all resist buying the asset. The contrast is
also valid when the momentum oscillator dwells
in the oversold band throughout a long bearish condition.
Look At charts
Amazon.com Inc stock, monthly chart
A bullish hot spot trading zone that is on the edge of a rising trend line
coincides with the oversold slow stochastic (8,3,3). TSTW SYS 008
traders will switch to the signal time frame then use the TSTW Key
02 for a low risk entry point.
One should not forget the financials.
Apple Inc stock, monthly chart (below)
The stochastic indicator is oversold when the price gained support
on top of the red Pitchfork tool. Technical traders and investors
will check the fundamentals
before loading this bullish cow (so to speak).
A bearish financial securities exhibits
lower lows and highs in a downtrend. The asset must present a
lower low before the inferior high. It is an imperative requirement
for a standard bearish movement.
Nike Inc stock, daily chart (NKE)
A daily chart that is highlighting a red declining channel. Notice
also the two bearish trade setups on the edge as the
stochastic indicator reaches
the overbought band.
Like all technical indicators such as the RSI indicator
(RSI) and CCI indicator, the stochastic indicator performs very
well during a balanced market. However, in an uptrend, one
should only prioritise bullish signals on the edge of a rising
trend line if the financial asset has exhibited a prior higher high.
Conversely, in a downtrend, the best bearish trade setups occur on the
edge of a declining channel after the stochastic indicator becomes overbought
(and there was a prior lower low). As always, one will not trade the indicator
but the price.
The stochastic indicator gives warnings, but the price must validate them.
Please feel free to contact us if there is a need to clarify this subject.
The indicator is oversold at 20 but overbought at 80. However, traders
also use the of 25 and 75 limits to highlight the indicated levels. In all cases,
it is crucial to use the trading drill and triangle if one wants to