Let’s discuss about another technical analysis, the stochastic. As you may be already aware, It is well known that stocks trader/investor always try to find the “holy grail technical analysis indicator” which is an indicator that can tell when to buy and sell the stocks with 100% accuracy. However, as far as I know, there is no such indicator so it is useless to try to find it. Therefore, it is better to utilize the available indicators instead to do the useless effort to find the “holy grail indicator. Also that, we still can try to improve the certainty by combining two or more of the available indicators so our gain will be optimum.
As you may already know, candlesticks patterns are one of my favorite technical analysis indicators that have helped me to maximize the profit and to minimize the loss during my stocks trading venture. However, as I have mentioned before, one indicator is surely not enough since there is no such a “holly grail indicator”. Therefore, to increase the certainty, I need to combine the candlestick patterns with other available indicators. Two of my other favorite indicators are Volume and Stochastic Oscillator.
I have discussed about how volume can help to decide whether to buy or sell the stocks in this how to buy stocks blog. So, this time, let’s discuss about another one which is the stochastic oscillator. It is George Lane who introduce the Stochastic Oscillator as stocks trading/investing indicator. This indicator offers the useful information of stocks market which includes the buy signal, sell signal, overbought signal, and oversold signal.
Stochastic Oscillator describe the connection between the stocks closing price with its highest/lowest stocks price range. It is this connection which produce the buy signal, sell signal, overbought signal, and oversold signal. There are two-line signal in Stochastic Oscillator which are fast line (%K) and slow line (%D). For more understanding, let’s take a look at the fast line (%K) and slow line (%D) formula below:
Stochastic’s Fast Line (%K) Formula
%K = ((C-Ln)/(Hn-Ln)) x 100
with:
C = Closing Price during the trading day
Ln = Lowest Price during n period
Hn = Highest Price during n period
n = the intended watching period
Stochastic’s Smoothed Line (%D) Formula
%D = (3dƩ(C-Ln)/3dƩ(Hn-Ln)) x 100
with:
3dƩ = Total sum of three days
C = Closing Price during the trading day
Ln = Lowest Price during n period
Hn = Highest Price during n period
n = the intended watching period
As we can see from formulas above, the Smoothed Line (%D) is obtained by smoothing the Fast Line (%K) with 3 days period. Stochastic Oscillator is designed to oscillate between 0 and 100. There are two important line which are the 20 line and 80 line which acts as signal for overbought and oversold condition. So, in here, we have the fast line (%K), smoothed line (%D), 20 line, and 80 line. Indeed, it is these four lines which tells us the time to buy or sell the stocks.
We will learn how to utilize these four lines of Stochastic Oscillator to make money in stocks trading in the next article. For now, let’s just understand what is exactly the Stochastic Oscillator and how it is formed. This knowledge is important as basic to more understanding the use of Stochastic Oscillator as stocks trading/investing indicator which will be discussed in the next article.
Have a happy stocks trading day by utilizing the Stochastic everyone!