Indicator
Stochastic
Indicator Type: Momentum Indicator
Index creator: George Lane
How it works: Comparing the last closing price with the highest and lowest price for a specified number of time periods.
Indicator components:
The indicator consists of two lines, a fast line called %K, and a slow line called %D.
The indicator movement ranges between zero and 100.
The midline of the indicator is the 50 level.
The 20 and 80 levels are added and they play an important role in the indicator signals as we will see in the following lines.
Benefit from the Stochastic Indicator:
Overbought and Oversold Signals:
Oversold: When %K drops below 20 forming a bottom, it is considered oversold, and the signal is activated when the price returns above 20 again.
Overbought: When %K rises above the 80 level forming a top, it is considered to be in an overbought situation, and the signal is activated when the price returns below the 80 level again.
Overbought is ignored in an uptrend, and oversold is ignored in a downtrend.
Divergence
Like most momentum indicators, the divergence signal between the price and the indicator is an important and leading signal in predicting price movements.
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