How to Read a Stochastic Chart
In addition to giving clear buy and sell signals, the Stochastic technical analysis indicator is also helpful in detecting price divergences and confirming trend.
How to Read a Stochastic Chart
Buy Signal
When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.
When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.
There are two common ways to interpret these waves. The first is based on when the red and blue lines cross. A potential buy signal is generated when the blue line crosses above the red line, and a potential sell signal is generated when the red line crosses above the blue line.
Sell Signal
When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.
Sell Signal
When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.
The second way to translate these charts is based on a reading of the blue line (%K). When %K is at 20 or below, the stock is considered to be oversold . When %K goes above 20, the stock should be bought. On the other hand, when %K is at 80 or above, the stock is considered to beoverbought , and when %K goes below 80, the stock should be sold
Stochastics come in two flavors: fast and slow. Fast stochastics produce more buy and signals than slow stochastics, but some of the signals produced by fast Stochastics may be "false." Slow Stochastics produce fewer, but "stronger" signals.
Stochastic Fast
Stochastic Fast plots the location of the current price in relation to the range of a certain number of prior bars (dependent upon user-input, usually 14-periods). In general, stochastics are used to measure overbought and oversold conditions. Above 80 is generally considered overbought and below 20 is considered oversold. The inputs to Stochastic Fast are as follows:
- Fast %K: [(Close - Low) / (High - Low)] x 100
- Fast %D: Simple moving average of Fast K (usually 3-period moving average)
Stochastic Slow
Stochastic Slow is similar in calculation and interpretation to Stochastic Fast. The difference is listed below:
- Slow %K: Equal to Fast %D (i.e. 3-period moving average of Fast %K)
- Slow %D: A moving average (again, usually 3-period) of Slow %K
