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TAFX
USING THE STOCHASTIC OSCILLATOR
12th February 2015
Leow Zhi Heng & Jeremiah Li
TAFX Department
Disclaimer
Using the Stochastic Oscillator
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Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Agenda
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• Introduction to Technical Indicators
• Introduction to the Stochastic Oscillator
• Using the Oscillator
• Limitations
Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Agenda
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
• Introduction to Technical Indicators
• Introduction to the Stochastic Oscillator
• Using the Oscillator
• Limitations
12th February 2015
Introduction to Indicators
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
What are they?
• Statistics used to:
Forecast stock trends and price patterns
Who uses them?
• Short-term traders – Technical Indicators
• Long-term investors – Entry/Exit
Why use them?
• To provide confirmation for entry and exit points
12th February 2015
Agenda
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
• Introduction to Technical Indicators
• Introduction to the Stochastic Oscillator
• Using the Stochastic Oscillator
• Limitations
12th February 2015
Introduction to the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
What is it?
–Oscillator which follows momentum
• Momentum: Rate of rise/fall in prices
When to use it?
–Best used in a market:
• Trending sideways
• With high volatility
Why use it?
–It is a sensitive oscillator
12th February 2015
Introduction to the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
(John Murphy)
Stochastic Oscillator
Consists of:
%K Line
• Shows you the location of the close price in a specified time period
%D Line
• Moving average of %K within a time period
12th February 2015
Agenda
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• Introduction to Technical Indicators
• Introduction to the Stochastic Oscillator
• Using the Oscillator
• Limitations
Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
• Three ways to utilize the oscillator
–Make use of overbought/oversold region
–Look out for crossovers between %K and %D lines
–Make use of divergences
• Signals which satisfy all three conditions are the strongest
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using Overbought and Oversold Regions
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using the Overbought and Oversold Region
• Green area above 80 is
considered Overbought
• Red area below 20 is
considered Oversold
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using the Overbought and Oversold Region
• Green area above 80 is
considered Overbought
– High probability of price
• Red area below 20 is
considered Oversold
– High probability of price
12th February 2015
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using Crossovers
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using Crossovers between the %K and %D Lines
1. Identify crossover:
A crossover is when:
– %K line crosses the %D line
If the %K moves ABOVE the %D line, it’s a BUY signal
If %K moves BELOW the %D line, it’s a SELL signal
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using Crossovers between the %K and %D Lines
2. Take note if
crossover is
near/close to
Overbought or
Oversold region
• Crossovers near the Overbought and Oversold regions are strong signals
12th February 2015
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using Divergences
12th February 2015
Using the Stochastic Oscillator
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Using Divergences
• What is a Divergence?
– When Price moves in a direction opposite of the Stochastic Oscillator
12th February 2015
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Agenda
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report
• Introduction to Technical Indicators
• Introduction to the Stochastic Oscillator
• Using the Oscillator
• Limitations
Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
12th February 2015
Limitations
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
• False Signals
–Do not use the Stochastic Oscillator alone
–Instead, combine with other methods of analysis
12th February 2015
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Using the Stochastic Oscillator
Leow Zhi Heng & Jeremiah Li
TAFX Department
Stochastic Oscillator Strategies:
–Stochastic Pop and Drop
• StockCharts.com » ChartSchool » Trading Strategies and Models » Stochastic Pop and Drop
In depth information on Stochastic Oscillator:
– Go to Stockcharts.com » ChartSchool » Technical Indicators and Overlays » Stochastic Oscillator
Additional Information
12th February 2015