Stochastic: Definition
Stochastic is a momentum indicator in technical analysis that compares a security’s closing price to its price range over a specific period of time. The indicator consists of two lines – %K, which represents the current price relative to the high-low range, and %D, which is a moving average of %K.
Stochastic: How it Works
Stochastic is used to identify overbought and oversold conditions in a security. Overbought conditions suggest that a security’s price is trading near the upper end of its range and may be due for a pullback, while oversold conditions indicate that a security’s price is trading near the lower end of its range and may be primed for a rebound.
Stochastic: Interpretation
Traders often use Stochastic in conjunction with other technical indicators to confirm trading signals. A common strategy is to look for bullish signals when %K crosses above %D in oversold territory, and bearish signals when %K crosses below %D in overbought territory.
Stochastic: Conclusion
Overall, Stochastic is a valuable tool for identifying potential reversals in a security’s price trend. By understanding and interpreting Stochastic signals, traders can make more informed decisions about when to enter or exit a trade.
