The Stochastic Oscillator
Invented by George Lane, the Stochastic Oscillator is a momentum indicator that compares the closing price with the spread over a given period. As with the RSI (relative strength index), it allows you to visualise with graphs the oversold and overbought zones.
This indicator is highly volatile, therefore it is recommended that you use it with other Oscillators such as the RSI or the MACD (moving average convergence divergence). The slow stochastic oscillator is frequently used since it is less volatile and therefore gives off less false signals.
Use of the slow Stochastic Oscillator
The stochastic oscillator is preferably used in a market that doesn't exhibit any clear tendency. If the market is in an upward trend, it is preferable to use buying signals; the opposite is true for falling markets.
- Identifying overbought and oversold zones
If the stochastic oscillator is over 80, the cross is considered to be overbought (sell signal).
If the stochastic oscillator is below 20, the cross is considered to be oversold (buy signal).
- Identifying zones of divergence as well as shifts in the market
When the stochastic oscillator evolves in the opposite direction, it is called divergence. This signal indicates an upcoming shift in the market.
