When it comes to technical analysis, there are many different indicators out there. One of the most popular is called stochastic. In this article, we'll take a look at what this indicator is, how it's used, and what you need to know about it.
So what is stochastic?
Stochastic is an indicator used to measure the momentum of a stock. It does this by comparing the current share price with its past prices. The idea behind this is that if a stock is rising rapidly, it will have a higher stochastic reading. On the other hand, if a stock is falling, it will have a lower stochastic reading.
The stochastic indicator is composed of two lines. The first line is called %K, and the second line is called %D. %K is the faster of the two lines, and %D is the slower of the two lines.
The indicator is considered in overbought territory when the %K line is above level 80, considered in oversold territory when the %K line is below level 20.
How is stochastic used?
There are a few different ways to use stochastic. One way is to simply look at the location of the %K line in relation to the %D line. If the %K line is above the %D line, then this is considered a bullish signal. On the other hand, if the %K line is below the %D line, then this is considered a bearish signal.
Another way to use stochastic is to look for divergences. A bullish divergence occurs when the stock is making new lows but the indicator is not. This is taken as a sign that the stock is about to turn around and start to rise. A bearish divergence occurs when the stock is making new highs but the indicator is not. This is taken as a sign that the stock is about to turn around and start moving down.
Finally, Stochastic can be used to generate buy and sell signals. A buy signal is generated when the %K line crosses above the %D line. A sell signal is generated when the %K line crosses below the %D line.
What you need to know about stochastics
There are a few things you need to be aware of when using this indicator. First, stochastic is a lagging indicator. This means that it will not give you a warning signal of a trend change. It is only after the trend has already started to change that the indicator will start giving you signals.
Second, stochastic can give false signals. This means that you can get a buy signal even if the stock is still in a downtrend. On the other hand, you can get a sell signal even if the stock is still in an uptrend. As such, it is important to use Stochastic in conjunction with other indicators such as support and resistance levels to confirm the signal.
Finally, it is a volatile indicator. This means that it can fiddle, or false signals, in a hectic market. As such, it is important to use the indicator in conjunction with other indicators such as moving averages to confirm the signal.
In short, Stochastic is a popular indicator used to measure the momentum of a stock. It consists of two lines, %K and %D, considered to be in overbought territory when the %K line is above level 80, and in oversold territory when the %K line is below level 20. Stochastic can be used to generate signals buying and selling, but you need to be aware that it is a lagging indicator and can give false signals.