Technical Analysis: Stochastic Oscillator

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Technical Analysis: Stochastic Oscillator

Please make sure you have the most updated mfd_dm, mfd_ta and mfd_tex packages for Stata installed for this post.

Stochastic Oscillator is another technical analysis tool that is based on momentum of the stock price.

slow_stoch

The chart for the fast stochastic is as follows:

fast_stoch

 

Meaning:

  1. Below 20: price is near its period low
  2. Above 80: price is near its period high

Fast of slow stochastic:

  1. Fast: K is actual stochastic figure, D is 3 days SMA of fast K
  2. Slow: K is 3 days SMA of task K, D is 3 days SMA of slow K

Divergence:

  1. Bullish: Price goes lower low, stochastic goes higher low. Bearish momentum is decreasing, bullish reversal is possible.
  2. Bearish: Price goes higher high, stochastic goes lower high. Bullish momentum is decreasing, bearish reversal is possible.

Set-up:

  1. Bullish: Price goes lower high, stochastic goes higher high. Bullish momentum is increasing.
  2. Bearish: Price goes higher low, stochastic goes lower low. Bearish momentum is increasing.