Stochastics: What are they Good for? Absolutely…something! 5 things, in fact. Stock TickerPicker has optional stochastic indicator charts that can be enabled and many people prefer this indicator over the MACD or other indicators.
Here’s what stochastics can tell you:
- When momentum has changed, before the price has turned. A standard stochastic chart is a momentum oscillator, so it turns direction before the change shows up in the stock price.
- When a stock is overbought or oversold. Stochastic indicators are generally considered to be signaling an overbought state if they read >80 and are indicating an oversold state if they read <20.
- When a bull or bear divergence is signaled. If the stochastic chart is showing a higher low while the price chart is showing a lower low, that is a bullish divergence – the momentum is shifting. If on the other hand the stochastic chart is showing a lower high while the price chart is showing a higher high then you have a bearish divergence – momentum is shifting negatively.
- When a bull or bear setup is signaled. This is basically the inverse of divergences. If the stochastic chart is showing a lower low while the price chart is showing a higher low, then you know momentum is setup against the stock and it’s time to sell it short. On the other hand, if the stochastic chart is showing a higher high while the price chart is showing a lower high, then this is a bullish setup – momentum has shifted but it hasn’t fully been demonstrated in the stock price yet, so buy it!
- What the bigger trend is vs. the short-term signal. Stochastics come in two standard flavors, fast and slow. Fast stochastics operate in a very responsive manner, while slow stochastics take the 3-day moving average of the fast line (%K).