INTRODUCTION TO STOCHASTIC OSCILLATOR
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The Stochastic Oscillator is developed by DR. George Lane in 1950s is a versatile tool for technical analysis in securities trading.
The stochastic indicator picks one inspecting point in current base and assigns to all points in the defined range from where the highest and lowest point are considered for comparison. It helps to determine the current momentum when compared to high & low of memorable set in form of support and resistance levels.
The momentum changes before the price moves to that direction. On the grounds of which this tool was developed.
Stochastic Fast devises the location of the current price in relation to the range of a certain number of prior bars. Broadly endeavour stochastic are used in an attempt to uncover overbought and oversold conditions.
The Stochastic Slow might be considered as superior due to the smoothing effects of the moving averages which equates to less false potential buy and sell signals. VARIABLES OF STOCHASTIC OSCILLATOR:
a)%K Periods. This is the number of time periods used in the stochastic calculation.
b)%K Slowing Periods. This value controls the internal smoothing of %K. A value of 1is considered a fast stochastic;a value of 3 is considered a slow stochastic.
c) %D Periods. This is the number of time periods used when calculating a moving average of %K. The moving average is called "%D" and is usually displayed as a dotted line on top of %K.
d)%D Method. The method Exponential, Simple, Time Series, Triangular, Variable, or Weighted that is used to calculate %D.
While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to locate convenience in harmony with the bigger trend.
The Stochastic indicator can also be used to identify turns near support or resistance. If a security trades near support with an oversold Stochastic Oscillator, looking for a break above 20 to signal an upturn and outstanding support test.
The momentum or speed of the price of a stock changes before the price changes itself. In this way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals bullish or bearish divergences. This is the first signal, and arguably the most important, trading signal Lane should be identified.
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