The Stochastic Oscillator Momentum Indicator

Trending the price moves of stocks helps any investor make the buying and selling decisions they need. Stochastic allows investors the ability to track the move of the market through price and time and is based on the idea that prices moves in waves. The high and the low movements of the stochastic signify the overbought and oversold levels of stocks, and day traders can see that as price trends develop and mature, the closing price will show the shift that is occurring with the stock. When a stocks closing price is going higher, the stochastic will show this trend as moving upward. Conversely, when a stocks closing price is going down, the stochastic will be moving in a downward trend. To make this day trading strategy effective, traders need to understand what the stochastic tells them. The display of the stochastic is typically made up of two moving averages - %K, which is the faster-moving average, and %D, which is the slower-moving average. The typical timeframe for the stochastic is 14 periods, but keep in mind that the timeframes can be changed depending upon the timeframes a trader wants to examine. With that in mind, the timeframe of %K is generally in multiples of 7, while the timeframes for %D are moving averages of 3 or 5 periods. Experienced traders are taught to examine the stochastic for a breakout – when %K crosses %D, but traders cannot use this method blindly. Traders need to look for another important factor when using this tool. They need to check for a confirmation of the crossover and ensure that it occurs between the 80 & 20 area. You might notice on your stochastic that the faster line crosses the slower line trending upward when both lines are beneath the 20 area (oversold area), but you need to get a confirmation before taking action. Wait until both the fast and slow lines have crossed the 20 line before deciding what to do, as this area will tell you that the stock could be at a near-term reversal or that it is at support. In the overbought area (above the 80 line), the stochastic will tell you that the price could also be at a near-term reversal or that it may have encountered resistance. In terms of day trading tips, you can use the stochastic to help you determine entry and exit points in the trade. In designing day trading systems, areas of support and resistance need to be identified on the chart. As %K and %D trend higher, look for areas of retracement as areas of support. If the price moves higher, but doesn’t move higher on the stochastic and the support line is broken, this may signify a potential point of exiting the trade. The stochastic is a popular momentum indicator that is used with both short term and long term trades. When day trading online, one thing to always keep in mind when trading against the stochastics is to confirm the price with the information you gather from the chart itself so that you are positioning your trade for success.