Profitable Trading Patterns with Stochastic Oscillator Indicator
The Stochastic Indicator is created to move between 0 and 100. The oversold conditions in the market are marked by low levels (areas around 0) and the high levels (areas around the 100) denote the overbought markets. When we say the market has “Overbought”, we mean the market has gone too high and is getting ready to get on its way down. An “Oversold” condition is when the market has gone so low and it is on its way back up.
Fig.5.0 is a chart that holds an overbought and oversold condition. Buying opportunities are sought after when the stochastic indicator gets closer its lower horizontal line. On the other hand selling opportunities can be noticed when the stochastic indicator gets closer the upper horizontal line. As a matter of fact, we are aware of how terrible the markets get near bottoms, but at the same they present the best time to buy. As an investor you can start getting ready to sell when the market rallies to the upper horizontal line.
So many newbies out there get it wrong by trying so hard to simplify their market experience. It is important to make it clear that using the Stochastic Oscillator with other indicators is unacceptable. This is largely because when we get a strong bullish trend, the stochastic indicator gets overbought and begins to show signs of premature sell alerts.
When the market experiences a flash sell off, we find a scenario where the Stochastic indicator gets oversold and starts exhibiting a buy signal that’s too young for the market. What this means is that, this trading indicator would entail the use of other trend-following indicators.
At this point, you are tied to the question of whether the Stochastic indicator should turn bullish before buying? Or do we wait for the Stochastic indicator to turn bearish before we start selling? The real truth is that if you wait for the stochastic at every point to make that turn before you step in, then you’ll be losing inn on trades, thus a lot of cash. The various points of extremes (i.e. the lines of overbought and oversold) are investor’s emotional points, and as such it makes it easy for investor to factor these in and make monies off emotional investors.
At times when we get positive divergence between the Stochastic and the price of an instrument, take a bullish position. When we discover price falling to a new low, we call that a positive divergence. A negative divergence occurs when we have an instrument like Stock rising to a new high
It is vital at every time to remember not to purchase stocks when the Stochastic is high. The reverse is also true, we avoid shorting an instrument when the Stochastic indicator is low. This is somewhat one of the easiest ways of using the Stochastic indicator. As a matter of fact, the moving averages are better at getting trends, the ADX is superior at catching entry and exits.