Description
The Stochastic is a technical analysis tool first developed by George Lane in the 1950s. It is an oscillator-type indicator, which means that it oscillates between two extreme values, indicating whether the market is overbought or oversold. The Stochastic Indicator measures the market’s momentum by comparing a security’s closing price to its price range over a specified period.
Input Parameters
- Fast %K (Fast Stochastic): A Stochastic Indicator variation emphasizing recent price movements, offering more responsive signals.
- Slow %K (Slow Stochastic): A Stochastic Indicator variation smoothing out short-term fluctuations, providing more stable signals for identifying major trend changes.
- Fast %D: The moving average of Fast %K, offering a smoothed representation of recent price momentum.
- Slow %D: The moving average of Slow %K, providing a reliable indication of longer-term price momentum.
- Upper: The threshold, typically set at 80, indicates overbought conditions in the indicator.
- Lower: The threshold, commonly set at 20, suggests oversold conditions in the indicator.
Use Case:
- Buy/Sell Signal: When the %K line crosses above the signal line, it is considered a buy signal, indicating that the market is likely to experience a bullish movement. When the %K line crosses below the signal line, it is considered a sell signal, indicating that the market is likely to experience a bearish movement.
- Overbought/Oversold: When the Stochastic Indicator is above 80, it is considered overbought, and traders may look for opportunities to sell. Conversely, when the Stochastic Indicator is below 20, it is considered oversold, and traders may look for buying opportunities.
- Divergences: A bullish divergence occurs when the price of a security forms lower lows while the Stochastic Indicator forms higher lows. This suggests that the selling pressure is decreasing, and the market may be due for a bullish reversal. Conversely, a bearish divergence occurs when the price of a security forms higher highs while the Stochastic Indicator forms lower highs. This indicates that the buying pressure is weakening, and a bearish reversal may be imminent.
This feature can be used in:
- Market Scanner
- Strategy Tester
- Multi-Factor Alerts
- Smart Checklist
Do you want to learn more? Check out our Learning Center Article.