Fast Stochastic Oscillator

The fast stochastic oscillator compares two lines called the %K and %D lines to predict the possibility of an uptrend or a downtrend. In price charts, the %K line typically appears as a solid line, and the %D line appears as a dotted line. The fast stochastic oscillator can be used effectively to monitor daily, weekly or monthly periods.

Those two lines identify :

• Bullish: %K and %D lines fall below and then rise above the 20 threshold, indicating bullish potential, along with a %K line cross above the %D line, triggering a bullish signal event if these 3 crossovers occur within a 5-day period.
• Bearish: %K and %D lines rise above and then fall below the 80 threshold, indicating bearish potential, along with a %K line cross below the %D line, triggering a bearish signal event if these 3 crossovers occur within a 5-day period.

When you are using stochastics with price charts, you have to keep severals ideas :

• When the %K line nears the 100% or 0% line a powerful move is set to occur. Some technical analysts equate the extremes with overbought or oversold conditions, and that prices cannot get any higher or lower. However, Edwards and Magee identify that this is not true in all situations, and that the extremes instead represent the strength of a price move.
• A divergence is said to have occurred when the price and oscillator trend lines move in different directions. A price reversal may follow.
• Lane referred to a flattened %K or %D line as hinges. A hinge may indicate that the uptrend or downtrend has become exhausted, and that a price reversal may occur.
• When the price has reached 80 or higher, and a divergence has occurred, a crossover is the sell signal. Similarly, when the price has reached 20 or lower, and a divergence has occurred, a crossover becomes the buy signal.