Stochastic Oscillator

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Stochastic Oscillator

Table of Contents

Stochastic Oscillator

Introduction

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator “doesn’t follow price, it doesn’t follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price.” As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. As the Stochastic Oscillator is range-bound, it is also useful for identifying overbought and oversold levels.

Calculation

The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods. %D is a 3-day simple moving average of %K. This line is plotted alongside %K to act as a signal or trigger line.

Interpretation

The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10, which is the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. 8 divided by 10 equals .80 or 80%. Multiply this number by 100 to find %K. %K would equal 30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range, 15 when it was near the bottom and 57 when it was in the middle of the range.

Fast, Slow or Full

There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lane’s original formulas for %K and %D. In this fast version of the oscillator, %K can appear rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the “only signal which will cause you to buy or sell.” Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic Oscillator (chart 2).

Fast Stochastic Oscillator:

Slow Stochastic Oscillator:

The Full Stochastic Oscillator is a fully customizable version of the Slow Stochastic Oscillator. Users can set the look-back period, the number of periods for slow %K and the number of periods for the %D moving average. The default parameters were used in these examples: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3).

Full Stochastic Oscillator:

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Overbought/Oversold

As a bound oscillator, the Stochastic Oscillator makes it easy to identify overbought and oversold levels. The oscillator ranges from zero to one hundred. No matter how fast a security advances or declines, the Stochastic Oscillator will always fluctuate within this range. Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold. These levels can be adjusted to suit analytical needs and security characteristics. Readings above 80 for the 20-day Stochastic Oscillator would indicate that the underlying security was trading near the top of its 20-day high-low range. Readings below 20 occur when a security is trading at the low end of its high-low range.

Before looking at some chart examples, it is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure. It is, therefore, important to identify the bigger trend and trade in the direction of this trend. Look for occasional oversold readings in an uptrend and ignore frequent overbought readings. Similarly, look for occasional overbought readings in a strong downtrend and ignore frequent oversold readings.

Chart 3 shows Yahoo! (YHOO) with the Full Stochastic Oscillator (20,5,5). A longer look-back period (20 days versus 14) and longer moving averages for smoothing (5 versus 3) produce a less sensitive oscillator with fewer signals. Yahoo was trading between 14 and 18 from July 2009 until April 2020. Such trading ranges are well suited for the Stochastic Oscillator. Dips below 20 warn of oversold conditions that could foreshadow a bounce. Moves above 80 warn of overbought conditions that could foreshadow a decline. Notice how the oscillator can move above 80 and remain above 80 (orange highlights). Similarly, the oscillator moved below 20 and sometimes remained below 20. The indicator is both overbought AND strong when above 80. A subsequent move below 80 is needed to signal some sort of reversal or failure at resistance (red dotted lines). Conversely, the oscillator is both oversold and weak when below 20. A move above 20 is needed to show an actual upturn and successful support test (green dotted lines).

Chart 4 shows Crown Castle (CCI) with a breakout in July to start an uptrend. The Full Stochastic Oscillator (20,5,5) was used to identify oversold readings. Overbought readings were ignored because the bigger trend was up. Trading in the direction of the bigger trend improves the odds. The Full Stochastic Oscillator moved below 20 in early September and early November. Subsequent moves back above 20 signaled an upturn in prices (green dotted line) and continuation of the bigger uptrend.

Chart 5 shows Autozone (AZO) with a support break in May 2009 that started a downtrend. With a downtrend in force, the Full Stochastic Oscillator (10,3,3) was used to identify overbought readings to foreshadow a potential reversal. Oversold readings were ignored because of the bigger downtrend. The shorter look-back period (10 versus 14) increases the sensitivity of the oscillator for more overbought readings. For reference, the Full Stochastic Oscillator (20,5,5) is also shown. Notice that this less sensitive version did not become overbought in August, September, and October. It is sometimes necessary to increase sensitivity to generate signals.

Bull/Bear Divergences

Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a higher low. This shows less downside momentum that could foreshadow a bullish reversal. A bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a lower high. This shows less upside momentum that could foreshadow a bearish reversal. Once a divergence takes hold, chartists should look for a confirmation to signal an actual reversal. A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above 50.

50 is an important level to watch. The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline. Think of it as the 50-yard line in football. The offense has a higher chance of scoring when it crosses the 50-yard line. The defense has an edge as long as it prevents the offense from crossing the 50-yard line. A Stochastic Oscillator cross above 50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below 50 means that prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty.

Chart 6 shows International Gaming Tech (IGT) with a bullish divergence in February-March 2020. Notice how the stock moved to a new low, but the Stochastic Oscillator formed a higher low. There are three steps to confirming this higher low. The first is a signal line cross and/or move back above 20. A signal line cross occurs when %K (black) crosses %D (red). This provides the earliest entry possible. The second is a move above 50, which puts prices in the upper half of the Stochastic range. The third is a resistance breakout on the price chart. Notice how the Stochastic Oscillator moved above 50 in late March and remained above 50 until late May.

Chart 7 shows Kohls (KSS) with a bearish divergence in April 2020. The stock moved to higher highs in early and late April, but the Stochastic Oscillator peaked in late March and formed lower highs. The signal line crosses and moves below 80 did not provide good early signals in this case because KSS kept moving higher. The Stochastic Oscillator moved below 50 for the second signal and the stock broke support for the third signal. As KSS shows, early signals are not always clean and simple. Signal line crosses, moves below 80, and moves above 20 are frequent and prone to whipsaw. Even after KSS broke support and the Stochastic Oscillator moved below 50, the stock bounced back above 57 and the Stochastic Oscillator bounced back above 50 before the stock continued sharply lower.

Bull/Bear Set-Ups

George Lane identified another form of divergence to predict bottoms or tops, dubbed “set-ups.” A bull set-up is basically the inverse of a bullish divergence. The underlying security forms a lower high, but the Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high, the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next decline is then expected to result in a tradable bottom.

Chart 8 shows Network Appliance (NTAP) with a bull set-up in June 2009. The stock formed a lower high as the Stochastic Oscillator forged a higher high. This higher high shows strength in upside momentum. Remember that this is a set-up, not a signal. The set-up foreshadows a tradable low in the near future. NTAP declined below its June low and the Stochastic Oscillator moved below 20 to become oversold. Traders could have acted when the Stochastic Oscillator moved above its signal line, above 20 or above 50, or after NTAP broke resistance with a strong move.

A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a lower low. Even though the stock held above its prior low, the lower low in the Stochastic Oscillator shows increasing downside momentum. The next advance is expected to result in an important peak. Chart 9 shows Motorola (MOT) with a bear set-up in November 2009. The stock formed a higher low in late-November and early December, but the Stochastic Oscillator formed a lower low with a move below 20. This showed strong downside momentum. The subsequent bounce did not last long as the stock quickly peaked. Notice that the Stochastic Oscillator did not make it back above 80 and turned down below its signal line in mid-December.

Conclusion

While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend.

The indicator can also be used to identify turns near support or resistance. Should a security trade near support with an oversold Stochastic Oscillator, look for a break above 20 to signal an upturn and successful support test. Conversely, should a security trade near resistance with an overbought Stochastic Oscillator, look for a break below 80 to signal a downturn and resistance failure.

The settings on the Stochastic Oscillator depend on personal preferences, trading style and timeframe. A shorter look-back period will produce a choppy oscillator with many overbought and oversold readings. A longer look-back period will provide a smoother oscillator with fewer overbought and oversold readings.

Like all technical indicators, it is important to use the Stochastic Oscillator in conjunction with other technical analysis tools. Volume, support/resistance and breakouts can be used to confirm or refute signals produced by the Stochastic Oscillator.

Using with SharpCharts

As noted above, there are three versions of the Stochastic Oscillator available as an indicator on SharpCharts. The default settings are as follows: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3). The look-back period (14) is used for the basic %K calculation. Remember, %K in the Fast Stochastic Oscillator is unsmoothed and %K in the Slow Stochastic Oscillator is smoothed with a 3-day SMA. The “3” in the Fast and Slow Stochastic Oscillator settings (14,3) sets the moving average period for %D. Chartists looking for maximum flexibility can simply choose the Full Stochastic Oscillator to set the look-back period, the smoothing factor for %K and the moving average for %D. The indicator can be placed above, below or behind the actual price plot. Placing the Stochastic Oscillator behind the price allows users to easily match indicator swings with price swings. Click here for a live example.

Suggested Scans

Stochastic Oscillator Oversold Upturn

This scan starts with stocks that are trading above their 200-day moving average to focus on those that are in a bigger uptrend. Of these, the scan then looks for stocks with a Stochastic Oscillator that turned up from an oversold level (below 20).

Stochastic Oscillator Overbought Downturn

This scan starts with stocks that are trading below their 200-day moving average to focus on those that are in a bigger downtrend. Of these, the scan then looks for stocks with a Stochastic Oscillator that turned down after an overbought reading (above 80).

For more details on the syntax to use for Stochastic Oscillator scans, please see our Scanning Indicator Reference in the Support Center.

Further Study

John Murphy’s Technical Analysis of the Financial Markets has a chapter devoted to momentum oscillators and their various uses, covering the pros and cons as well as some examples specific to the Stochastic Oscillator.

Martin Pring’s Technical Analysis Explained explains the basics of momentum indicators by covering divergences, crossovers, and other signals. There are two more chapters covering specific momentum indicators, each containing a number of examples.

Technical Analysis of the Financial Markets
John J. Murphy
Technical Analysis Explained
Martin Pring

Additional Resources

Stocks & Commodities Magazine Articles

The Stochastic Oscillator by Joe Luisi
Nov 1997 – Stocks & Commodities

What Is the Difference between MACD and Stochastic Indicators?

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MACD and Stochastic are two types of technical analysis that attempt to produce signals for investors on possible security price trends, although they do so in vastly different ways. The MACD, also known as the Moving Average Convergence-Divergence, relies upon moving averages, which are average stock prices over a period of time, to anticipate stock trends. By contrast, the Stochastic Oscillator depends upon a formula based upon current stock prices along with their highest high prices and lowest low prices of the recent past. Both MACD and Stochastic provide signals at certain points on price charts where there is crossover between two lines.

Technical analysis of stocks and other securities is based upon the idea that past price behavior of a security or a group of securities can anticipate how the prices will move in the future. Different analysts have come up with formulas that can be used to predict things like price trends and the momentum of those trends. Two of these techniques, MACD and Stochastic, go about it in different ways.

The MACD, or Moving Average Convergence-Divergence, takes the 12-day moving average of a particular security and subtracts the 26-day moving average of that same security. A moving average is the average price of the security over the specified time period, which changes, or moves, as time passes and new data replaces old. Usually, the MACD hovers close to zero. When it is above zero, it indicates a positive trend in price, and when it is below, it means that a downward trend is afoot.

By contrast, the Stochastic Oscillator is concerned not only with current prices but also with the highs and lows of a security in the recent past. The Stochastic Oscillator formula takes the difference between the current price and the lowest low in the last 14 days, then divides that total by the difference between the highest high and the lowest low. That total is multiplied by 100. When that total goes above 80, it indicates that the stock is overbought, and when it falls below 20, it means the stock is oversold.

With both the MACD and Stochastic, charts can be made of the different totals, indicating crossover points with other signals. The idea behind both is to use these crossover points along with the totals as signals to buy or sell. Some analysts even use these analyses in tandem to verify what each is indicating.

Stochastic Oscillator Complete Trading Guide

The Stochastic Oscillator is a momentum indicator that is designed to give you an objective measure of the momentum in your trading instrument.

It’s bounded by the numbers 0 and 100 and will oscillate between those two areas.

It will show you the relationship of the closing price to the high low range of N periods of time. The default lookback is 14 periods.

The lines on the Stochastic indicator (trigger and signal line) moves up and down, it does not always track price movement. As with any technical analysis trading indicator, the Fast or Slow Stochastic Oscillator is only a tool and should only be used as part of an overall trading strategy.

I’m not going to draw a conclusion for you as to the effectiveness but will cover how you can trade with the Stochastic Oscillator and it applies to all versions of the indicator.

Stochastic Oscillator Settings and Calculation

You may find different calculations depending on the charting package that you are using however this is the proper formula for the fast Stochastic.

%K=(C-L)/(H-L) ×100 C=Close is current closing price L=Lowest low over X periods. H=Highest high over X periods

The Slow Stochastic is calculated differently where %K is a 3-period moving average of the fast %K. %D is an x-period moving average of the fast %K.

The Full Stochastic Oscillator is different from the fast and slow version as you are able to set custom variables which include:

  • Traders can set the lookback period for the calculation
  • The number of periods used to slow the %K and %D

The most common settings are:

  • 14.3 for the slow and fast stochastic
  • 14.3.3 for the full stochastic

Remember that any trading indicator is simply one cog in the wheel of a complete trading system. You will probably not rely on one thing to indicate a trading opportunity.

FULL VS FAST VS SLOW STOCHASTIC

There is no real difference when using the same setting for the full and slow stochastic oscillator. The fast stochastic is much more reactive and can have a trader a little too active in their trading.

Best Settings For The Stochastic Oscillator

Many trading indicators will give you the opportunity to adjust many of the inputs that will be used in the calculation. This can be a good thing when trying to optimize for current market conditions but it can produce more headaches than trading results.

  • If 14, 3, 3 is a great setting, why not 13?
  • What about 5, 3, 3?
  • What about any combination you can think of?

Keep in mind that the shorter the look-back period, the more movement you will get with the indicator. A setting of 14 will be slower than a 5.

One of the reasons I prefer the slow Stochastic is I find it plots smoother on the charts. Fast Stochastic is ragged in appearance which has to do with it being more sensitive than the slow version of the indicator.

There is no best Stochastic Oscillator setting that will produce more wins than losses.

Most of the time, the best stochastic setting is actually the default setting. The amount of time you spend trying to optimize the settings is better spent seeing how the indicator reacts to the price movements.

Far too many traders think they will need one setting for day trading, one Stochastic setting for swing trading, for scalping, for different time frames. Don’t get caught in that rabbit hole.

Is There A Best Setting For Day Trading?

If you were set on changing the oscillator for day trading, there may be a valid reason – day trading is limited to the session. This means that you may want a slightly faster trading signal and I would suggest only looking at the lookback period.

In this chart, I have used the slow stochastic setting of 14.3 and 5.3.

Best Stochastic Setting For Day Trading – You Decide

You can see the 5.3 stochastic setting on this one minute chart of crude oil reacts quicker to price and in some instances, crosses to the downside. If that is your entry/exit trigger, you are exiting a trade before it goes onto make highs.

Each trader has to decide if the trade-off between quicker signals and more whipsaw to slower signals and smoother price movement, is worth it.

How To Use Stochastic Oscillator For Swing Trading or Day Trading

Now that we know that the Stochastic is a momentum oscillator that measures the momentum of the last X periods (look back), let’s look at some uses of the indicator.

There are dangers when trading the often touted methods without taking a more critical look at what not only what the indicator is telling you, but what price action and structure is telling you.

Ensure you use any trading indicator in the context of an overall trading plan. Price action is often one-way traders will utilize a trading indicator when trading.

Here are some stochastic oscillator trading strategies you may consider for Forex trading, futures, stocks, or any market of interest.

Overbought and Oversold Trading Strategy

The “stoch” is often used to identify overbought and oversold levels however keep in mind that was not the original use of the indicator

The stochastic oscillator is a range-bound indicator which means it can oscillate between two extreme levels, 0 and 100.

For the purpose of an oversold or overbought indicator, levels are generally accepted to be:

  • Below 20 is considered oversold
  • Above 80 is consider overbought

Many traders use these oversold and overbought levels to time a trade in the opposite direction of these readings however often times the market can stay in this condition while the stochastic stays in the oversold/overbought zones.

  • Oversold is below 20 and using a 14-period stochastic look back, price is trading at the low end of the past 14-day range.
  • Overbought is above 80 and using a 14 period look back, price is trading at the high end of the past 14-day range.

This does not mean the market is about to reverse. It can indicate extreme weakness or strength. Any interpretation is done by the trader but remember this is a momentum indicator. Your safest trade would be in the direction of the trend – going long if price action shows a reversal out of an oversold condition, for example.

But it also doesn’t mean the move will continue. There will be times that a reversal will correlate to an oversold or overbought Stochastic reading.

Oversold and Overbought Stochastic Examples

We are looking at momentum and when momentum is high enough to force the Stochastic lines into either of these levels, it indicates strength/weakness and if you’ve traded long enough, this can indicate the market is primed for a reversal.

This chart shows a market in both conditions and you can see that:

  • Overbought – The market changes direction and the last “reversal” would have had you exiting any short positions
  • Oversold – Market reverses but if you notice the first reversal to the upside, we didn’t need an oversold condition to start the move.

Is taking a trade simply because of the trading signal of the Stochastic a good idea? In this case, there were some trading opportunities but this should lead you to go and find where this fails.

When backtesting anything in trading, ensure you are seeing the whole picture and not just what you want to see.

When you see this condition, think of it telling you that at this point, the market is probably in a strong directional trend and barring any strong support or resistance, it will probably continue in that direction.

“An object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force” – Newton

You will get counter moves (unbalanced force) that may slow down the momentum of the market but to reverse it, that force must be strong. That strength is often found at historical structure points.

Using oversold and overbought conditions of the stochastic indicator may have a better edge when trading in the direction of the overall trend. You can use those readings for trade/risk management purposes such as scaling out or trailing your stop loss.

Look For Confluence On Your Charts

You may find opportunities when a confluence of technical factors line up when the market is oversold or overbought. This may be an opportunity to pull some profits out of the market but you want to watch how price reacts around these areas. It must show some signs of weakness in order for you to find yourself in a higher probability trade.

There are plenty of opportunities for trades while the market in both states in this example. I can see range failure tests, range breaks, and even engulfing candlestick patters broken with strength and this is only using this time frame.

The key is using your trade plan to dictate your trading setups, finding them in favorable conditions, and executing them.

Bullish and Bearish Divergence Trading

George Lane, the developer of the indicator back in the late 1950’s, actually used it for stochastic divergence – the bullish divergence or bearish divergence of the Stochastic when compared to price.

The price goes one way and the Stochastic goes another, divergence is usually the play traders look for. This was the original play that Lane was looking at when developing the Stochastic but like I keep saying, an indicator signal by itself is not always the smartest opportunity.

Bullish Divergence Example

  1. If the price is in a downtrend, compare lows of price and Stochastic
  2. If the price is in an uptrend, compare highs of price and Stochastic
  3. If price makes lower low but Stochastic makes a higher low, consider longs as this could be a bullish divergence
  4. If price makes higher higher but Stochastic makes lower high, consider shorts, as this could be a bearish divergence

This is a down-trending price and you can see that price puts in a low lower than the previous low. The Stochastic puts in a higher low which indicate the potential for a move up in price – bullish divergence

An uptrend would be the opposite. Price would make a higher high but the Stochastic Oscillator would put in a lower high.

Remember that the Stochastic measure’s momentum and even though the price is moving down, the momentum calculation is pointing to the upside. It does not mean we are about to have a strong trend to the upside.

Stochastic Oscillator And Price Trend

One component of a Stochastic oscillator trading strategy you may want to employ is an objective measure of the quality of the price trend and the trend direction itself.

If the price is trending to the downside, your trading plan may call for continued short positions instead of counter-trend trades. All trends are not created equally and the Stochastic will help you determine the quality of the momentum of the trend.

The first green area shows the Stochastic pointing to the downside. You would only be looking for a sell signal when this is the market condition.

More importantly, look at the separation of the slow and fast line of the indicator. That indicates that there is a nice smooth trend in play. A slow Stochastic trend is the momentum trend and for this, you may want to consider using an MTF (multiple time frame) approaches in your trade plan.

Essentially we are looking for the momentum direction on a higher time frame and looking for trades on lower time frames in the same direction.

When using multiple time frame trading approaches, look for a difference of 3-5 times. For example, you can use a 60-minute trend for trades on the 15-minute time frame. For simplicity, traders may look at the daily chart for the momentum trend while in Forex, some traders use the daily-4 hour combo and the 4 hour-1 hour combo.

Once the fast line crosses up and over the slow line, a stochastic crossover, we can objectively state we are in an uptrend. Look again at the nice separation between the slow and fast lines. This makes for virtually ideal trading conditions.

Look for a separation between the lines as well as sweeping up or down moves of the Stochastic to indicate a trend quality that you may find conducive to better trading opportunities.

Trading In Choppy Market Conditions

The red area shows the Stochastic slow and fast lines tight together with many crosses of each line. Look at the price action during this time and that shows a market where there bulls and bears are in an almost equal battle.

Is that condition conducive to pain-free trading? This may be a time where you sit on your hands or, depending on your trading plan, look at a different time frame combination to trade.

Stochastic Oscillator Crossover With Technical Analysis & Price

We can take some of what we have covered and add a few layers of confluence to it that may add to the probability of some price movement in our favor. To do so, we are going to add in some price structure to aid us in a trading decision.

Since we can use a Stochastic crossover as a trend change signal, we can also use the crossover as a trade entry buy and sell signal.

This chart has a few examples using horizontal support and resistance. We also see trend lines in action as well as reversal candlesticks. Make sure you look to the Stochastic crossover to see the buy and sell signals that were given while we also had technical confluence.

Stochastic Crossover With Technical Analysis & Price

This was making a case for trading as opposed to just firing off a trade because the trading indicator gave a typical (and textbook) signal.

When you add in a confluence of factors including price structures, you improve your odds of some movement in your favor. Nothing is perfect so having a trading plan that includes risk tolerance and trade management is extremely vital.

You can also add in the stochastic divergence that was covered early as part of the confluence you need to see before taking a trade.

Indicators Just Part Of The Trading Puzzle

There are still many people who believe you can simply apply an indicator to a trading chart and take the signals when presented.

As pointed out, to do so will not equate to a positive trading outcome. You need more.

Simply applying the basics such as support and resistance or trend lines will, at least, give you something to trade against. They can also keep you out of taking trades directly into points of the chart that may offer some opposing forces that will challenge your trades.

You want to ensure that any trading system you use that has trading indicators is also thoroughly tested and if based on multiple indicators, that they complement each other. Having two momentum indicators, for example, is not needed and just adds a layer of complexity to any trading strategy.

Remember one of the key elements of a trading plan is how you manage your trades and the risk you will take. Those are as crucial, if not more so than what setups you use for your trades.

Whether you use the slow Stochastic as part of your trading plan or any other indicator, ensure that you critically analyze the information it presents so you can see both the pros and cons of each. Testing a trading system and each variable is hard and tedious work.

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