Stochastic

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The Stochastic (stoch) is an oscillation indicator taking values fluctuating between 0 to 100 and is used to determine Extreme market conditions.  It essentially compares where a security’s price closed relative to its price range over a given time period.

The Stochastic (%K) is plotted against its Moving Average (%D) in a similar way as the MACD.

Used as an Extremes measurement

If the Stochastic value is above 80 market is overbought.

If the Stochastic value is below 20 market is oversold.

Otherwise market is neutral.

Clearly we would like to be a buyer when oversold and a seller when overbought.

stochastic

 

The chart above shows how the Stochastic became overbought after the market price reached its top and then it started dropping. The opposite happened later when the Stochastic became oversold and the market started rising.

Stochastic can also be used to determine what the Wave is (Short  Term Trend)

If the Stochastic crosses above its Moving Average the Wave is up. (Buy)

If the Stochastic crosses above its Moving Average the Wave is down. (Sell)

This can also be seen in the chart above

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