Stochastics - Stochastics calculates the close price in relation to a security over a certain period of time.

The Stochastics oscillator contains two lines, a solid lined called %K and a dotted line called %D.

This indicator can be used in one of two ways.

We can use Stochastics to generate buy of sell signals, or as a overbought of oversold indicator.

To generate buy and sell signals we wait until either the %K or %D lines cross over the trigger levels.

When one of the lines crosses over the band from upside a sell signal is generated.

On the other hand, when it crossed from the downside a buy signal is generated.

We can also use crossovers of %K and %D lines as buy and sell signals.

When %K cross %D from upside a sell signal is generated.

When %K cross %D from downside a sell signal is generated.

Here the red arrows represent sell signals and the green arrows represent buy signals.

The Stochastics oscillator can also be used as an overbought and oversold indicator for short term trading.

When Stochastics reaches it's highs the security is overbought, and a sell signal is generated.

When Stochastics reaches it's lows the security is oversold, and a buy signal is generated.

But remember that a security that has entered overbought or oversold can remain overbought or oversold, and can continue to become more overbought or oversold before reversing.

Therefore we have to look for evidence of weakness in the trend before we take any action.

The Stochastics oscillator can also be used as a leading indicator by looking for possible divergences.

If the price makes new highs and these are not seen in Stochastics we have a bearish divergence, and we can anticipate the price will soon go down.

If the price makes new lows and these are not seen in Stochastics we have a bullish divergence, and we can anticipate the price will soon go up.