| The stochastic oscillator is in a category of technical | | | | indicator will precede this reversal. |
| indicators called momentum indicators, which measure | | | | Looking at a stochastic oscillator can be more insightful |
| the velocity of price changes instead of the actual | | | | in some ways than just the typical RSI momentum |
| trend or price levels themselves. Since this indicator | | | | indicator because there is more information conveyed |
| measures price velocity and does not care about | | | | on the indicator itself. It uses a typical 0-100 scale with |
| actual price levels, it works as a great predictive | | | | the same overbought and oversold parameters as the |
| indicator that can indicate overbought or oversold | | | | RSI, but on the stochastic oscillator there are two lines |
| market conditions which can warn a trader that the | | | | related to the velocity of price data instead of just one. |
| price is vulnerable to a short-term change in direction. | | | | There is a faster moving line on the indicator which is |
| One of the most popular momentum indicators that is | | | | the actual stochastic level that measures momentum, |
| included in nearly every charting package is called the | | | | and then there is the slower moving line which is a |
| Relative Strength Index, which gauges price velocity on | | | | moving average of the original momentum levels that |
| a scale of 0-100 with 50 as the center line, where | | | | can act as your signal line just like a moving average |
| market conditions below 20 indicate oversold and | | | | on the price chart will do. |
| market conditions over 80 indicate overbought. This is | | | | When the stochastic line crosses the moving average |
| very valuable information to a trader for two reasons: | | | | line from the bottom going up, this is the signal to buy; |
| First, a change in the velocity of price movement will | | | | when the stochastic line crosses the moving average |
| tend to occur before a change in price levels, so the | | | | line from the top going down then this is the signal to |
| indicator can yield signals that are predictive and not | | | | sell. These signals are particularly valid when a buy |
| retrospective in nature. Second, it is the buying or selling | | | | signal is given in oversold territory and a sell signal is |
| pressure of bulls and bears that creates up and down | | | | given in overbought territory, because this is your |
| movements in the price, but once a price move | | | | indication of a short-term reversal in price which will be |
| reaches its zenith and there is no more momentum or | | | | given before the actual price movement, meaning that |
| market pressure to keep the market moving, this is the | | | | you can get in the market at the right time and make |
| signal for a market reversal and the momentum | | | | sure that your sell price is higher than your buy price. |