The two Stochastics lines:
– K – Is the main line and is usually displayed as a solid line
– D – Is simply a moving average of the K and is usually displayed as a dotted line
There are two well known methods for using the K and D indicators to make decisions about when to buy or sell stocks. The first involves crossing of K and D signals, the second involves basing buy and sell decisions on the assumption that K and D oscillate.
In the first case, D acts as a trigger or signal line for K. A buy signal is given when K crosses up through D, or a sell signal when it crosses down through D. Such crossovers can occur too often, and to avoid repeated whipsaws one can wait for crossovers occurring together with an overbought/oversold pullback, or only after a peak or trough in the D line. If price volatility is high, a simple moving average of the Stoch D indicator may be taken. This statistic smoothes out rapid fluctuations in price.
Use Stochastics in Trending market The key is when the market is trending up, we will look for oversold conditions (when the Stochastics fall below the oversold level (below 20) and rises back above the same level) to get ready to trade, and in the same way, when the market is trending down we will only look for overbought conditions (when the Stochastics rise above de overbought level (above 80) and falls back below the same level.
Use Stochastic in Trend-less market
– Buy when K falls below the oversold level (below 20) and rises back above the same level.
– Sell when K rises above de overbought level (above 80) and falls back below the same level.