STOCHASTIC OSCILLATOR (Stochastic)
(A) Introduction
▸A momentum indicator used to
identify when an instrument is currently overbought
or oversold
▸It is easy & simple to
understand with a high degree of accuracy in signaling when to enter the market.
▸It is used to measure the
degree of change between an instrument’s closing price and its price range over a period of time.
▸Displayed as an oscillator
(line graph), scaled from 0 to 100.
1) 80-100 : Indicates an overbought
market
2) 0-20 : Indicates an
oversold market
(B) Overview
(C) Application Of Stochastic
▸The application for Stochastic
is somewhat similar to the Relative Strength Index (RSI); Investors normally combine both indicators together
to obtain the same signal.
▸The concept applies the famous
saying of ‘Buy Low , Sell High’
▸Investors will sell when the
Stochastic lines are above 80; while buy when the lines are below 20.
▸One thing to note about the
Stochastic is that the lines may stay around the overbought & oversold levels for a long period of time;
Investors are advised to closely
monitor price actions for any breakout confirmation before trading with Stochastic signals.
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