How to Interpret Stochastic Oscillations (Stock Price Analysis)
The chart of stochastic oscillations in a stock's price can be used to make decisions about whether or not to buy, sell, or hold on to a stock. There are several ways to interpret the oscillations in %K, %D, and the price of the stock.
(This article assumes that you know how to make a stochastic oscillator chart. with graphs of %K and %D. For reference, please read the article in the resources section.)
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Instructions
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First, look at the line graphs of fast %K and fast %D and notice where the lines intersect. If those lines show too much volatility (many sharp peaks and valleys), then you can use the slow %K and slow %D lines, which are smoother.
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Now, look at the instances where the %K line crosses and rises above the %D line. This indicates point when you should buy the stock. And if you look at the instances where the %K line dips under the %D line, then this is a signal to sell.
What is the rationale for this method of stochastic interpretation? The %K line is above the %D line when the price is on the rise, and it lies below the %D line when the price is falling. And because stock traders aim to buy low and sell high, these crossings signal the appropriate time to buy or sell.
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For another way to interpret the stochastic oscillations, observe when the %K and %D lines rise above .8 = 80% and dip below .2 = 20%.
When the %K and %D lines rise above 80%, many stock analysts recommend selling as soon as the lines dip back down below 80%. And when the %K and %D lines dip below 20%, analysts advise stock traders to buy once the lines rise above 20%.
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To learn a third way of using a stochastic oscillator, first make a graph of each day's stock price and place that graph above the graph of %K and %D values.
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Now, look at divergences in the trend of the stock price versus the trend of the %K and %D lines.
When the price dips to a lower low, but at the same time the %K line has a higher low, this is a signal to buy. When the price rises to a higher high, but at the same time the %K line has a lower high, this is the point at which to sell.
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