Day Trading with the Stochastic Oscillator
Day trading with the Stochastic Oscillator is a great way to identify potential entry and exit points for trades quickly, enabling you to capitalize on short-term price movements. It’s also easy to read, interpret and act upon. Here’s a closer look at what the Stochastic Oscillator is, how it works, and how you can use it to your advantage.
What is the Stochastic Oscillator?
The Stochastic Oscillator was created in the 1950’s by George Lane. It is a momentum indicator that measures the purchasing pressure behind a stock. Its purpose is to compare the current close price with a range of previous prices in order to determine if the security is overbought or oversold.
The Stochastic Oscillator provides traders with a simple and straightforward signal. It consists of two lines: The %K line (fast) and the %D line (slow). The %K line is the most important when it comes to analyzing the Stochastic Oscillator. When the %K line is below 30, it is signaling that the security is oversold. Conversely, when the %K line is above 70, it is signaling that the security is overbought.
How to Use the Stochastic Oscillator for Day Trading
When using the Stochastic Oscillator for day trading, it’s important to understand its role in the overall indicators you are using. A standard approach combines several indicators to find high-probability entry points. Once you have identified where the support or resistance levels are, you can use the Stochastic Oscillator to determine when to enter or exit the trade.
For bullish trades, you want to look for the %K line to cross above 20 and then cross above the %D line. This is a signal that implies an upside breakout is likely. You then watch the security’s price movements to see if this signal proves accurate.
For bearish trades, you want to look for the %K line to cross below 80 and then cross below the %D line. This signals a likely downside break out and you will want to watch the security’s price movements to see if this signal is correct.
The Stochastic Oscillator is a valuable indicator for day traders and can be used to identify potential entry and exit points quickly. Its straightforward signal and ability to help traders act quickly, give it a great advantage in the trading world. However, it’s important to note that no one indicator should be used in isolation and it’s important to combine the Stochastic Oscillator with other indicators in order to properly identify high-probability trades.