Posted by forex at 5:53 AM
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1. Understand that a stochastic oscillator is used to call turning points for short-term and intermediate trading. It uses a comparison of 3- and 14-day trends. Know that stochastic oscillators rely on the action of the market to close near its highs during bull periods and its lows during bear moves.
2. Compute the %K on a spreadsheet. In column 1, enter the value 100. In column 2, enter today's price. In column 3, enter the lowest price of the past 14 days. Subtract column 3 from column 2 and enter the remainder in column 4. Multiply columns 1 and 4 in column 5.
3. In column 6, enter the highest price in three days. Enter the lowest price of the last three days in column 7. Subtract column 7 from column 6. Enter the remainder in column 8. Column 8 is the range of price.
4. Divide column 8 into the result from column 5. Enter the result in column 9. The answer in column 9 is the stochastic oscillator. It takes its value as a whole number between 1 and 100. Note that 14 is a common series to use for analysis, as are 9- and 5-day periods.
5. Compute the moving average of the %K. This is called the %D. It is usually measured as a simple three-day moving average. Take the %K calculated for the last three days and average the results. The next day, drop the oldest data point and add the new day's data and average.
6. Buy stocks when the %K crosses above the %D. Sell stocks when the %K crosses below %D. Use values above 80 as overbought signals. Use values below 20 as oversold signals.