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Slow Stochastic
Using the Stochastic oscillator we can compare the current
stock price to its overall price range over a specified period of time. The
theory of the stochastic indicator is based on the principal that in an up
trending market, stocks tend to close near their highs & in a downward market
stocks tend to close near their lows.
We use the stochastic indicator to plot two lines on a
chart with the values from 0 to 100. These are the %D & %K with the %D line
being the more significant of the two. If the readings are above the 80 line
then this signifies that the stock price is nearing its high & will reverse
soon. If the readings are below 20 then this would mean that its at its lowest
point.

Chart courtesy of
StockCharts.com
In a Ranging market go long on bullish divergence (on %D)
where the first trough is below the oversold level.
Go long when %K or %D falls below the oversold level &
rises back above it.
Go long when %K crosses above %D
Go short on bearish divergence (on %D) where the first peak
is above the overbought level.
Again go short when %K or %D rises above the overbought
level & then falls back below it
Finally go short when %K crosses below %D
In a trending market the shape of the stochastic bottom can
give you some indication of a rally. If the bottom of the stochastic indicator
is narrow but not very deep, this indicates that the following rally should be
strong. If the bottom is deep & broad then this means that the rally should be
weak.
We can also apply this to the tops of the stochastic
indicator. If the tops are narrow then this means that the bulls are weak & that
a correction is likely to follow. If the tops are high & wide then this
indicates that the bulls are strong. Remember to get the most out of stochastic
indicators make sure you know which market you’re trading in i.e. Ranging or
trending.
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