So far, we have learned the basic of Stochastic Oscillator (which includes the formulas) as well as the Stochastic’s buy signal, sell signal, overbought signal, and oversold signal. This knowledge is surely more than enough to finally make money in stocks with Stochastic. However, since the knowledge is purely theoretical, it would be better if there is the practical tips. Yeah, it would be great if there is a real example how exactly we can utilize the Stochastic in real stocks trading so we can make money in stocks.
Refreshing the Stochastic Knowledge
Therefore this time, I will write about how we can use the Stochastic to make money in stocks market. In here, I will utilize the Stochastic’s buy signal, sell signal, overbought signal, and oversold signal. Before continue, let’s summarize what we have learned so far. As mentioned before, Stochastic is a Technical Analysis Indicator which offers thestocks closing price information with its highest/lowest stocks range of stocks price. There are four available lines which are fast line (%K), smoothed line (%D), 80 line, and 20 line.
The entire Stochastic signals (buy signal, sell signal, overbought signal, and oversold signal) is produced by these four lines. Buy signal is when the fast line (%K) cross up the smoothed line (%D). Sell signal is when the fast line (%K) cross down the smoothed line (%D). Overbought signal is when the fast line (%K) or/and smoothed line (%D) is in above of 80 line. Oversold signal is when the fast line (%K) or/and smoothed line (%D) is in below of 20 line.
Stochastic also offers the market trends information which are up trend (bullish) and down trend (bearish). It is considered as down trend (bearish) when the fast line (%K) is in below of the smoothed line (%D). In contrary, it is considered as up trend (bullish)) when the fast line (%K) is in above of the smoothed line (%K). Stochastic also offers the support and resistance. The 20 line can act as support while the 80 line can act as resistance. Beside that, the imaginary stochastic 50 line can act as support as well as resistance.
How To Make Money In Stocks by Using Stochastic
As mentioned before, Stochastic offers the buy and sell signal. So, the most simple way to utilize it to make money in stocks is that we buy the stocks when there is a buy signal and sell the stocks when there is a sell signal. However, this way have a high risk since the signal may fake or work only in short time. It means that the gain may not optimum if we use this simple way. In other word, we surely need more than these simple buy and sell signal if want to make the optimum profit in our stocks trading venture.
Fortunately, beside the buy and sell signal, Stochastic also offers the overbought and oversold signal. We can combine the entire signals to make optimum money from the stocks trading. In here, we only buy and sell the stocks if the condition is fulfilled. The condition is the overbought and oversold area. We should only buy the stocks when the buy signal appears in oversold area. In contrary, we should only sell the stocks when the sell signal appears in overbought area. It also means that we should ignore the buy and sell signal in other area.
However, as additional, we can still consider the stochastic buy and sell signal near the support and resistance area. It is because the price movement may reverse in the support and area before move into the overbought and oversold area. Therefore it is still okay to buy the stocks when there is a buy signal right before the support (20 line, 50 line). But for more certainty, I suggest to buy the stocks right after there is a buy signal after the fast line (%K) and smoothed line (%D) reverse up from the support.
For selling, it is okay to sell the stocks when there is the sell signal right before the resistance (80 line, 50 line). However, for more certainty, I suggest to only sell the stocks when there is a sell signal right after the fast line (%K) and smoothed line (%D) reverse down from the resistance. It is need to wait for reversal (both for buy and sell signal) because there is also possibility that the support or resistance is penetrated.
So far we have four area for buying and selling — in oversold area, in overbought area, right in above support, and right in below resistance. From these four area, the most save area is the oversold area for buying and overbought area for selling. In here, we surely have the good area to make money in stocks. For better understanding about how to make money in stocks with Stochastic, let’s see the picture below:
As we can see, at the stochastic chart above, there are several buy signals in oversold area (green circle) and there are several sell signals in oberbought area (red circle). We also can see that after the sell signal, the price is down deeply and after the buy signal, the price is rise very high. It proves that the buy and sell signal in oversold and overbought area are really a good signal. So, as mentioned before, only buy the stocks if there is a buy signal in oversold area and only sell the stocks if there is the sell signal in oversold area. With this stochastic, we should already know how to make money in stocks.
Have a profitable stocks trading by using stochastic everyone!