Stochastic, MACD, Bollinger Bands Plus Day And Swing Traders

The stochastic indicator is a momentum oscillator developed by

George Lane.

Its primary task is to highlight bullish or bearish divergence.

Bullish 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.

   See chart

   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.

  Bearish divergence
 

  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.
 

  See chart

  JP Morgan Chase and Co stock, daily chart

  The chart highlights a bearish stochastic indicator

  divergence.

  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.

  See video

  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
  2/ (10,3,3).

  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.

  See charts

  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.

    See chart

    Chevron Corporation (CVX) stock, weekly chart

    A chart illustrating how the stochastic oscillator becomes oversold (or bullish)

    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.

    View chart

    Weekly chart Euro/Japanese Yen (EUR/JPY)

    A chart accentuating several overbought areas which coincide

    with resistances. 

     See video:

     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.

    Consult chart

    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). 

    Downtrend trading

    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.

    View chart

    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. 

     Final point

     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

     trade like a pro. 

     Check out the 24SP trading material