Stochastic (STC)

The Stochastic Oscillator was developed by Dr. George Lane to measures the relationship between an issue's closing price and its price range over a predetermined period of time. The indicator consists of two lines: the %K (the fast line) compares the latest closing price to the recent trading range and the %D (the slow line) is a signal line calculated by smoothing %K. The %D triggers the trading signals.

Although this may sounds complex, it is similar to the plotting of moving averages. Think of %K as a fast moving average and %D as a slow moving average. The lines are plotted on a 1 to 100-scale. "Trigger" levels are normally drawn on stochastics charts at the 80% and 20% levels. The zones above and below these two lines can be referred to as the stochastic bands. The 80% value is used as an overbought warning signal, and the 20% is used as an oversold warning signal. The signals are most reliable if you wait until the %K and %D lines turn upward below 5% before buying, and the lines turn downward above 95% before selling.

Trading signals
Go Long : Stochastic fall below 20% and then rises above that level
Go Long : The %K line cross above the %D line
Go Long : Prices are making a series of new lows and the stochastic is trending higher
Go Short: Stochastic rises above 80% and then falls below that level.
Go Short: The %K line cross below the %D line
Go Short: Prices are making a series of new highs and the stochastic is trending lower

Above shows Stochastic indicator trading signals for AMZN (NASDAQ - Amazon). The trading signals are generated by the crossovers between the %K and %D lines only. Using these trading signals, the following trades might have made by assuming that trading made at the open price on the following day when Stochastic generated a trading signal. Please note that the profit is calculated solely on the difference of the open position price and close position price excluded the commission and etc.

Back to top