Stochastics Indicator

#momentum #oscillator #overboughtoversold

Creator: George Lane

Shows where the current close sits inside the high-low range of the last N bars, on a scale of 0 to 100. Close near the top of the range gives a high reading, close near the bottom gives a low reading. Two lines: %K (fast) and %D (its average).

• %K: 5
• %K Slow: 5
• %D Slow: 3

Stochastics is another popular indicator used by many traders and investors. Two lines plotted below the chart when we plot Stochastics indicator.

1. Green line is a %K Stochastics line
2. The red line is a %D Stochastics line

When the Stochastics indicator is at the upper range, it indicates that the recent price is at the upper range of the last five candles. If the Stochastics indicator is below the lower range, it means that recent prices are below the range of the last 5 candles.

Stochastics above 50% indicate that the current price is above the mid-range price. Therefore, rising Stochastics above 50% indicate bullish momentum, while falling Stochastics below 50% indicate bearish momentum.

Among the most popular parameters are 5,3,3 and 14,3,3.

Stochastics reading above 50% and a %K reading above %D indicates a bullish trend.

Stochastics reading below 50% and a %K reading below %D indicates a bearish trend.

Reading above 80 means price is closing near recent highs. Reading below 20 means price is closing near recent lows.

Useful readings:

Stochastic above 80: Overbought zone, price may pause or pull back

Stochastic below 20: Oversold zone, price may bounce

%K crosses above %D: Short-term momentum turning up

%K crosses below %D: Short-term momentum turning down

Stays above 80 for long: Very strong uptrend, do not short blindly

Stays below 20 for long: Very strong downtrend, do not buy blindly

Price makes new low but Stochastic does not: Bullish divergence, bounce likely

Objective rules:

Bullish: %K crosses above %D while both are below 20.

Bearish: %K crosses below %D while both are above 80.

Long exit: %K crosses above 80 and then turns down

Short exit: %K crosses below 20 and then turns up

Trend filter: In an uptrend take only bullish crossovers; in a downtrend take only bearish crossovers

What makes it unique:

It reads where price closes inside its recent range – a direct window on whether bulls or bears finish each period. Its two-line crossover became the template for oscillator timing signals.

Click here to learn more about this indicator.

The indicator table value in TradePoint & RZone also provides you with a list of all values of this indicator for any group of stocks. This will allow you to compare the readings of this indicator across different stocks.

This indicator is also available in the System Builder on RZone & TradePoint for all charting methods. Using the system builder, you can develop various strategies based on the different conditions already present in this indicator. Additionally, it can be used with other indicators or price patterns to develop effective trading strategies. For any group of stocks and market segments, you can scan and backtest stocks based on those strategies.

The indicator is applicable to all types of charting. It is calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin-Ashi charts, and lines on Kagi charts. While the formula and reading of the indicators remain the same, they become more dynamic on these charts.